Archive

02 | 2019 | A Digital World

Foreword and full PDF

Shifting to a Digital Economy

Today’s world is one where smartphones, mobile internet and online shopping are indispensable. China has already become a major player in this digital world, with mobile payments enabling more than 600 million mobile users to conduct peer-to-peer transactions and a mobile-payment infrastructure, which handles far more transactions than the mobile-payment market in any other country with over 85 percent of payments made via mobile. Not only is China providing a large and young market for tech giants, but it has also become a platform for innovation, being home to one-third of the world’s unicorns and major investors in digital technologies.

China is the world's largest e-commerce market, accounting for more than 40 percent of global e-commerce transactions, compared with less than one percent just a decade ago. It is estimated that the value of China’s e-commerce transactions has now even surpassed the sum of the world’s five largest advanced economies, the United States, Japan, Germany, the United Kingdom and France.

While Chinese consumers are enthusiastically embracing digital technologies, the immense amount of venture capital and policy makers, encouraging the investment in the digital economy, are creating favorable conditions for the rapid commercialization of digital business models, the digitization of industries in China still lags behind that of the United States by a considerable margin.

This may provide a good opportunity for international companies. China's huge internet user base can help international companies test the evolving market of retail, making use of big data and help them to achieve economies of scale quickly.

The digitization of industries and of our everyday life is happening globally. Hence, this issue of the German Ticker will take a closer look at how big data, mobile payments and cybersecurity will affect the future business landscape in China and worldwide.We hope you enjoy reading!

Yours Sincerely,

Maximilian Butek

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01 | 2019 | Smart China

Foreword and full PDF

Building Towards a Smarter World in China

The invention of the telephone aroused mistrust in the 18th century; in 1995, Bill Gates predicted the internet may only be a hype. However, today we know these predictions have not come to fruition. Future concepts and innovations have often been subject to the connotation of “mission impossible”. But, if digitalization is seen as a threat, opportunities may remain undiscovered. It is ideas and technology that are changing the future and contribute to new, high-scale growth.

Today, nine of the world's most valuable high-tech companies originate from China, eleven are from the United States, but (unfortunately) not even one is European. Entire industries are being put to the test of digitization and many are already undergoing transformation. Smart technology might soon embrace everyone’s life: From autonomous driving in electric vehicles over to smart homes, smart working places, and smart cities. Industrie 4.0 will create the jobs of tomorrow, new alliances will push forward connectivity. Smart ports and smart manufacturing might become more efficient, faster and cost effective. In order to enhance city residents’ quality of life, digital savvy, smart metropolises are creating networks to integrate the areas of energy, mobility, urbanization, administration and communication. The key to all this is a virtually unlimited raw material: Data.

Data offers a myriad of opportunities to provide intelligent solutions for any problems. Whether in autonomous mobility, healthcare, energy supply or trade: Artificial Intelligence (AI) can help transforming traditional industry to next level. And data is critical to AI; it’s at the heart of it, and it could simply be used to help understand the world better, offer customized solutions, and answers on the questions of tomorrow.

In this issue of the German Chamber Ticker, we will offer insights on how consumer behavior might disrupt the automotive industry and take a closer look at the development of 5G and how the Internet of Things (IoT) will shape China in the next few years. Furthermore, we will provide you with information on China’s desire to top the list for the smartest cities globally and much more.

We hope you enjoy reading! 

Jens Hildebrandt

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04 | 2018 | The Future Of Work

Foreword and full PDF

Picturing the Workspace of Tomorrow

China’s economic growth during the past 20 years has led to a rapid increase in wages. At the same time, automation, artificial intelligence and digital platforms are transforming the Chinese labor market. By 2030, the Chinese working-age population is expected to shrink by almost 38 million people and a rapid automation scenario depicts more than 200 million workers displaced due to new technology and automation. Socioeconomic and operational challenges are intertwined with business opportunities for both young start-ups and established market players.

Following the current trends of increased automation, steady growth in sales of industrial robots and demand for high-intelligence innovations, there is little doubt that the future of work will be strongly shaped by artificial intelligence and that it will take place in both virtual and actual reality. The extent that the contemporary workforce will be affected by job displacement and automation scenarios highly depends not only on the macroeconomic environment, but equally on individual micro-economic choices and the ability of organizations and individuals alike to embrace change.

As new technologies are beginning to penetrate the workplace, leaders need to rethink how to adjust the ways their businesses are run. In this issue of the Ticker, we will look into how organizations can adjust by implementing “New Work” structures or how executives can recognize and foster learning-centric leadership in their own organizations.

Embarking on new pathways and adapting to an increasingly digitalized environment, the German Chamber Ticker itself has engaged into a digital transformation. With more content published through the official German Chamber WeChat accounts of Shanghai and North China, the German Chamber Ticker magazine has been adapted to the demands of today’s “on the go” lifestyle.

 

We hope you enjoy reading!

Olivia Helvadjian

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03 | 2018 | Catering To The New Middle Class

Foreword and full PDF

Catering To The New Middle Class

China has no shortage of superlatives, both good and bad; starting with the Great Wall of China, one of the longest architectural feats in human history, to the fastest supercomputer in the world, the Tianhe 2. China also remains the biggest emitter of carbon dioxide worldwide, underlining the difficult balancing act that characterizes China’s rise.

China’s “think big” approach permeates all aspects of the Middle Kingdom and affects key economic indicators, but also the day-to-day lives of Chinese citizens. One example for a development at the interface of steady growth rates and real-life impact on what it means to live and work in China in 2018 and beyond is the emergence of China’s middle class. By current estimates, China’s rapidly developing Middle Class is slated to include over 550 million people in 2022 – that alone would make China’s middle class big enough to be the thirdmost populous country in the world. We are witnessing the rise of a new generation of spenders; even conservative projections expect the Chinese consumer economy to grow by 55% to USD 6.5 trillion by 2020 – that’s the value of the current entire consumer markets of Germany, Japan and the UK combined.

In a world driven by rapid e-commerce and the availability of everything your heart desires at the tap of your smartphone, the current Chinese generation is enthusiastically filling their virtual or physical shopping carts. This trend has inherent value for German companies – quality, “Made in Germany” is as popular as ever among Chinese consumers with disposable income. And as disposable income among Chinese consumers is growing, this edition of the GC Ticker will offer you unique insights into how to best cater to this segment.

With stories ranging from the luxury goods market to how the health and sustainability industries are expanding, this month’s issue will help you to navigate an increasingly demanding and sophisticated consumer base to maximize the impact of your current and future product portfolio.

It is my distinct pleasure to also present you with an exclusive op-ed by German Federal Minister for Economic Affairs and Energy Mr. Peter Altmaier, who will reflect on the importance of a level playing field in terms of global trade in view of his upcoming trip to the 2018 Asia Pacific Conference in Jakarta, jointly organized by the German Federal Ministry for Economic Affairs and Energy (BMWi), the Asia-Pacific Committee of German Business (APA), and Germany’s bilateral Chambers of Commerce Abroad (AHK) in the Asia-Pacific region.

All this comes in the wake of the first 2018 China International Import Expo, which will take place from November 5th to 10th in Shanghai. The expo, where Germany is one of the partner countries, will allow German companies to participate and explore economic opportunities in the Chinese market, as well as meet with top Chinese and international import decision makers, to further cater to the new Chinese middle class. We hope you enjoy reading!

Simone Pohl

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02 | 2018 | A Look into the Future

Foreword and full PDF

Shaping the Future

Artificial Intelligence (AI) is one of the most significant technical developments that will shape our future. It could be described as humanlydesigned advanced programs and hardware, that with the help of specific interfaces, are capable to record human and machine behavior on alarge scale and consequently mathematically process and imitate these behaviors at an incredible speed and far more accurately as humans.

This technological upheaval may change our environment as extensively as the industrial revolution. AI will automate monotonous, repetitivemental human work in all aspects of society. It will be a player at stock exchanges and markets, drive our cars, detect anomalies in our factories,facilitate “Industry 4.0” and will support doctors, lawyers, tax consultants, insurance agents and engineers.

Therefore, AI has been identified by China’s government as a corner stone of its “Made in China 2025” agenda. The “New Generation ArtificialIntelligence Development Plan”, which was released in July 2017, allocates research funding of multiple billion dollars to catch up with Westerncountries within three years, achieve major breakthroughs by 2025 and make Chinese Artificial Intelligence Technology “the envy of the world”by 2030.

Besides China’s abilities to develop a nationwide unified strategy and to allocate and concentrate financial resources, it has the advantages of ahealthy hardware manufacturing sector, a large educated population that embraces technological changes, Western educated talents returninghome, easy access to funding and less restrictions on the storage of personal data and last but not least the biggest domestic market potential.

Apart from China’s leading tech firms such as the “BATs” - Baidu, Alibaba and Tencent - an impressive ecosystem of tech-startups has grownout of China in recent years. Whereas Western talents might put a priority to a work life balance, there is the “996” term (start at 9, finish at9, work 6 days) for Shenzhen’s ambitions high tech firms. But there are not only first tier cities. Eleven provincial governments have announcedtargets that combined would create an AI core industry of CNY 400 billion by 2020 which is above the national target of CNY 150 billion.In Hefei the so-called “China Speech Valley” has emerged, where 200 companies, including large domestic players, are dedicated to speechrecognition.

By next year, it is expected that China will surpass the United States as the largest spender on research and development worldwide. Andlocations such as Shenzhen, where around 40% of all international Chinese patents are filed, can be expected to continue making headlines with the emergence of new, promising tech-firms.

It is an exciting time in Chinese technology: Hence, this issue of the German Ticker will take a closer look at several technologies developed inthe middle kingdom, such as artificial intelligence, virtual reality, robotics, virtual commissioning and crypto currency. These technologies bearthe promise to redefine the Chinese economy and might even shape the future of the world economy.

I hope this ticker will allow you to gain some insight into this world of tomorrow!

Mr. Ulf Reinhardt

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Cover Story 1 - China and the Global AI Race

Artificial intelligence (AI) refers to the use of digital technology to create systems that are capable of performing tasks commonly thought to require intelligence. The term describes a variety of technologies, including machine learning, computer vision or natural language processing. But why is there such a big hype about a technology that has existed for over 50 years?

By PROF. DR. ZHENG HAN, JAKOB BODENSTEINER

You are driving down an alley. After a confusing traffic situation, a group of children appear playing on the street. It is already too late to brake. You can either run into the group of children or steer your car into a tree. What would you do? Imagine now sitting in an autonomous car. How will your car decide, which is programmed to bring you safe home?

AI might become a dominant form on earth. It has the potential to take over economies through workforce automation or simply fool you through seemingly true videos or chatbots you fall in love with on Tinder. Right now, these are future scenarios, but even Google´s Eric Schmidt recently assessed that the possible conflicts between humans and intelligent robots are just one or two decades away.

AI already transforms our lives in a considerable amount of daily activities, even today. Smart assistants like ‘Alexa’, ‘Siri’ or Alibaba’s ‘Tmall Genie’ understand words and grammar and have become a daily assistant. Tesla or the new NIO ‘vision car’ bring computer vision to an extent that it enables fully autonomous driving. AI data aggregation is already usable for thousands of use-cases from digital healthcare assistants to cybersecurity, advanced marketing recommendations, robo-advisory and much more. Even in B2B, automation and predictive maintenance are changing manufacturing and production resulting in increased quality and productivity.

A noteworthy moment that showed the power of AI, especially in China, was the triumph of Google´s ‘Alpha Go’ algorithm over the human Go-champion Lee Sedol, which has been commonly regarded as unsolvable by machines. The algorithm was trained with millions of moves in the game of past masters, so that it predicts the chances of winning of its own moves. ‘AlphaGo Zero’, the latest evolution of ‘AlphaGo’, skips this step and learns to play simply by playing games against itself, starting from completely random play. In doing so, it defeated the previously published championdefeating version of ‘AlphaGo’ by 100 games to 0.

Recent substantial leaps in computing power, data availability and incremental findings in algorithms and data aggregation have made it possible to build products, services or business models based on AI. Still, it is only at the very beginning of this journey. Researchers all over the world work on chip- and semiconductor technologies that will exponentially increase the processing power of today´s computers. This will enable a constant development of new applications of AI technology. AI is reinventing the fundamental structure of most industries and of society. Opinions about what the future of AI will look like differ, but experts agree that AI capabilities become more powerful and widespread.

AI is a prospering new industry, where standardization is still at a very early stage. Although most of the famous AI achievements come from the United States, several countries have made similar advances. Now there is an opportunity for rapid breakthrough. With fast action plans, countries can either seize the commanding heights of innovation standardization, or else miss the opportunity. A global race for AI leadership has evolved and especially China has passionately declared its aspiration. The cake to win hereby is massive: optimistic market analysts see a potential market size of AI at more than USD 120 billion in 2025. To go there, in 2017 companies and investors spent in total around USD 35 billion in artificial intelligence projects and funding.

Data as key for China’s speed

Right now, the United States is heading the race in AI in most disciplines, but China, backed by the government, is chasing relentlessly. In 2016 the central government released its 13th Five-Year Plan for Developing National Strategic and Emerging Industries and set “AI Development” as sixth among 69 major tasks to pursue. In July 2017 the Chinese State Council released the New Generation AI Development Plan, which emphasizes the Chinese ambition to lead the world in AI and build up an AI industry of RMB 1 trillion by 2030.
They are already on track to do so: while most global AI-companies are currently US-based, Chinese startups overtook American startups in funding for the first time in 2017. Whatever metric chosen, whether it´s the magnitude of publications and patents, the frequency of cutting-edge advances, or the aggregate levels of investment, China is chasing to the top.

Cover Story 2 - Virtual Commissioning: One Step Further in Industry 4.0

China has the biggest automotive market and continues to grow. Data from International Federation of Robotics (hereafter as IFR) 2016 shows that the average of global robot density in the manufacturing industries is 74 robot units per 10,000 employees. While China ranks 23rd worldwide with 68 robot units per 10,000 employees, the Chinese government intends to push China into the world’s top 10 by 2020 (IFR Robot Density Rises Globally report, 2016). Higher automation level means more complexity. The higher automation level an industry has, the more benefits that an industry will get from virtual commissioning.

By LYNN CHEN

When talking about virtual, you may have bought a pair of 3D glasses for your kid and are thinking maybe this is what I meant. You may have heard virtual reality and played some games on your device. Did you think THIS is what I meant? Ok, maybe you didn’t know about virtual commissioning. You may wonder why industry would start using this method.

What is virtual commissioning?

Virtual reality, a computer-generated scenario, simulates experience. Virtual commissioning is also a computer-based technology that can be performed during the design phase before the physical commissioning stage. Based on 3D simulation and internet technology, virtual commissioning can simulate a visual experience on virtual factories where engineers can debug production programs and solve problems before they occur in the physical factory. It started to be known in manufacturing world for few years to lower the risk of onsite commissioning.

Jack has an idea for a new umbrella

Shanghai’s summer season usually starts in May. In recent years, the temperature has risen remarkably, sometimes going beyond 40 degrees. To protect themselves, many Chinese people use parasols to protect against the intense Shanghai sun.

In this scenario, we suppose that Jack owns an umbrella factory. In May, he gets a brilliant idea of making a newly designed umbrella, which will be a best seller, for sure. This new type of umbrella is great for sun protection and is also functional for rainy days. Most importantly, its design and appearance are quite different from any existing umbrellas on the market. Take a look at the production process of this parasol and make a hypothesis.

Due to the parasol’s new design, Jack needs to install some new machines, including some robots and other automation equipment to meet the production requirements.

Cover Story 3 - Digitally Integrated Production

So far, any changes to products or processes requested by a customer must be programmed manually in all systems involved in the process. Time and quality constraints make such change requests an unpopular part of industrial life.

By PROF. DR. HOLGER KOHL

Off the peg was yesterday. Today, many enterprises execute custom processes for every client or even every single order – often with annual repetition rates of 1.3%. Letting buyers choose the color or styles of custom trainers or designing custom car interiors are not a major problem. System suppliers regularly face completely different challenges: Their clients order components made from materials they have never used before or require certifications that their standard production processes were not designed to accommodate. Such special requests are a tough test for the economic viability of production processes.

The problem is simple: They take time. Mass production is designed to function like Swiss clockwork: An order is received, and everybody knows what needs to be done. From initial logistics down to the final touch, every process step is intricately linked with the next to keep the entire process running smoothly. This is far from straightforward with custom orders, which require much more coordination. A change in the raw materials needs careful checks whether the available machines can process the material, where the material can be procured, and how to proceed in general when it is not predetermined who does what at which point. This makes custom products much more expensive than mass production. The many advantages of customized products let clients accept greater costs to some extent – but truly flexible manufacturing can only become economically sustainable, if it is faster and cheaper than before. Throughput speeds and production costs need to hold their own with more established mass  production. Is that possible?

Industrie 4.0 or digitally integrated production (dip) offers thousands of promising solutions for the challenge Speed up, Costs down. The spectrum of options reaches from pinpoint interventions in existing systems to sweeping restructuring of entire process chains. At Hannover Messe 2017, Fraunhofer IPK has already showed how this could work in practice. Production of plastic components can be quick and economical, even if key production parameters are changed, thanks to integrated modular product, production, and IT architectures, smart data, and cloud-based control systems. Novel technologies keep the entire process speedy and responsive; Modular Shopfloor IT combines manufacturing facility flexibly in ever-new process chains and ready to handle customized orders. This becomes even more responsive when the machine controls are moved into the cloud: All software is brought together in one place, for easier maintenance and the speedy  integration of changes.

Modular Shopfloor IT: Complex IT architecture from simple building blocks

So far, any changes to products or processes requested by a customer must be programmed manually in all systems involved in the process. Time and quality constraints make such change requests an unpopular part of industrial life. Modular Shopfloor IT facilitates such change requests enormously. It integrates with the machine controls and makes them available for remote management and integration with higher systems. Changes to processes are then communicated through the IT system – e.g. from order management directly to production. The software relies on a building block principle: Even if a factory uses machines of all different makes and types, the control and monitoring functions will be similar. That means that only few modules are needed to cover the entire value chain of any company.

Industrie 4.0 application center in China

The Sino-German Intelligent Manufacturing Research Institute (SGIMRI) in Nanjing is an enterprise, focusing on “Combine Chinese Speed with German Precision”. It integrates training, demonstration and application research to create a comprehensive offer for companies in the Jiangsu Province. Fraunhofer IPK provides assistance for the strategic, organizational and technical planning and implementation of the five-year project. Fraunhofer IPK has already developed a comprehensive curriculum for the specific application of Industrie 4.0 in China and used the curriculum for initial training sessions to develop expertise. Important in this context are the integration of specific ancillary conditions and the enterprise culture in the Chinese business environment. The training addresses the leadership and management strategy changes, which are particularly necessary in China, as well as the ability to transform the area’s still running. In the process, experts from Fraunhofer IPK and the SGIMRI jointly develop concepts, in
which the technology-oriented Chinese views and German methodology focus complement each other.

In the process, the SGIMRI combines German engineering with the proverbial Chinese speed to turn innovative business models into innovative solutions. The benefit for the German economy is twofold. First, German machines and equipment will have a market in China, thus increasing German exports. Second, offerings of the SGIMRI will help German companies in China to optimize their processes and technologies according to the needs of the local Chinese markets. This creates methods and tools for the development of fast solutions for production prototypes, which will bridge long analysis and concept development phases. As early as in the first year, the collaboration realized technology-oriented innovation projects in Nanjing. While the teams worked together, the interplay of interdisciplinary and intercultural human assets emerged as the important engine for success.

World Intelligent Manufacturing Summit, Nanjing, China

The World Intelligent Manufacturing Summit opened in 2016 and 2017 in Nanjing. The Chinese Ministry for Industry and Information Technology organized the summit, which brought together representatives from political decision-makers, industry organizations and research institutes as well as almost 300 manufacturers from ten nations. Visitors attended keynote presentations and eight parallel sessions in the Nanjing International Expo Center. The Expo-Center also offered an exhibition of the newest technologies in the areas of artificial intelligence, smart manufacturing and automation. Together with its Chinese partner, Fraunhofer IPK introduced the new Sino-German Intelligent Manufacturing Research Institute (SGIMRI) in an approximately 300m² booth. SGIMRI has already developed successful technologies, a fact which is underscored by the Innovation Prize received by the Chinese-German project team for one of its exhibits. The exhibit allowed visitors to use their Chinese WeChat app to communicate with a robot controlled by IPK technologies.

Cover Story 4 - Blockchain: A Look into a Financial Future

To understand why China is implementing stricter rules regarding cryptocurrencies, we should first know the uncertainty of cryptocurrencies as a new financial product.

By XIAOCHEN ZHANG , XINRAN XU, ZHEYU LUO, JIAXIN LYU, AND MAN YIK LAU

China is embracing Blockchain

Countries worldwide are integrating fintech and blockchain technology into their government development strategies, and China is not an exception. Along with the previously issued blockchain whitepaper by the Ministry of Industry and Information Technology (MITT) listing a detailed implementation timetable of the technology in March 2018, China has demonstrated a clear commitment in a general and multifaceted adoption of blockchain, including the establishment of a well-formed blockchain standards system through the National Blockchain and Distributed Accounting  Standardization Technical Committee.

With the Chinese government’s encouragement and support, industry players have been involved extensively in exploring blockchain solutions, such as large banks (Bank of China, Industrial and Commercial Bank of China, China Construction Bank, China Merchants Bank) and tech giants such as BATJ (Baidu, Alibaba, Tencent, and JD.com). They either acquire or cooperate with fintech companies to develop core blockchain applications or develop their own teams to pilot specific blockchain experiments internally. The traditional industries are highly influenced by both the concept and application of blockchain. They started to transform their business with “+blockchain”. Starting from the IT industry, “+ blockchain” has now expanded to finance, supply chain, Internet of Things, public social work, energy, and entertainment.

Blockchain projects coming from China are very diverse, covering underlying infrastructure, open source application development, and application services. Amongst which the underlying infrastructure mainly provides data transmission and storage, hardware facilities and mining services; open source application development offer blockchain software services including BaaS (Blockchain as a Service) and API; while the application service layer incorporates blockchain technology into various scenarios such as digital asset management, notarization, supply chain management, insurance and information community. It is worth mentioning that most of the projects are  pertaining to blockchain solutions, with an emphasis on scalability.

While the newer cryptocurrency investors, who flooded in during the gold rush of Q4 2017 heading for the exits, massive institutional capital has entered the space investing blockchain startups at favorable prices. In Q1 2018, Chinese VC-backed blockchain startups have raised RMB 681 million across 58 deals, accounting for half of the investment last year and RMB 1.27 billion across 100 deals. With big money incoming, it is foreseen that the amount of equity financing in blockchain industry will continue to increase rapidly. Blockchain growth also makes blockchain talents a hot commodity especially those blockchain developers, followed by operations and marketing staffs. The influx of high-quality talents will highly increase the industry competitiveness, thus making the existing poor projects quit from market.

Cover Story 5 - Trends in China’s Intellectual Property System

This aspect of globalization, whether capital intense or organic growth oriented, facilitated Chinese companies to be more in touch with the foreign world, increasing their desire of having access to foreign expertise as well as products and services.

By REINOUT VAN MALENSTEIN

Intellectual property (IP) and China is hot at the moment, especially the subject of IP and technology transfer, with the current threat of a trade war between the USA and China based upon claims of the USA on this topic. But, is the environment currently that bad in regards to Intellectual property and technology transfer in China? Or, do companies just need to find the correct means in China in order to protect and safeguard their IP? This article will assess the current trends in the Chinese IP landscape, its important developments and focus on the ways on how businesses can get their China IP strategy right. For this, the focus will be on:
1. Patents, trade secrets and technology transfer,
2. Trademarks, designs and OEM, and
3. E-commerce.

Patents, trade secrets and technology transfer

First, let us look at the current issue of IP and technology transfer in China. In 2015, China has set out China Manufacturing 2025, a plan that wants to make China into an IP powerhouse. In reality this plan has made Chinese companies wholly buy up foreign companies, including their trade secrets and IP, or buy up their IP separately. In light of China Manufacturing 2025, on 29 March 2018 just after the trade war threats started, China has passed new measures that immediately came into effect that impose a mandatory IP review and technology transfer restrictions with regard to foreign companies.

The background of these new Measures is not new. Since 2002, China has had restrictions in relation to the import and export of technology. These restrictions divide the areas in which technology may be imported and exported into three areas: allowed, restricted, and prohibited. The new Measures, however, widen the existing restrictions and ensure a mandatory review by the Chinese Ministry of Commerce together with the relevant IP authority in the case of IP transfer. In addition, the measures create a security review with respect to intellectual property in the case of M&A by a foreign party in China. The Measures indicate that technology transfer and acquisitions are being assessed in relation to national security and the Chinese interest. A further clarification with regard to the definitions is not yet given.

It is important to realize that the purpose of the measures seems to be to keep intellectual property in Chinese hands. This means that because of intellectual property reasons, China could now potentially block the acquisition of Chinese companies by European companies based upon IP grounds. The new measures could lead to fear for European companies that this mechanism will be applied arbitrarily, creating uncertainty and inequality in the Chinese market.

Furthermore, it is important to realize that a Chinese Wholly Foreign Owned Enterprise (WFOE) and a Joint Venture are both qualified as a Chinese company. As such, European companies that are in China in such forms, that carry out research and development have the problem that they might not be able to transfer intellectual property (including patents and software), and technology to their European parent company.

In the future, European companies should assume that intellectual property and technology transfer from a Chinese company to a European company, and the acquisition of a Chinese company by a European company, will become more difficult. Companies should therefore register their intellectual property in China and have a good trade secret protection by means of the right contracts, and the implementation of physical and technological protection measures. The Chinese intellectual property rights system works quite well, provided if it’s well applied by companies. Intellectual property is of a territorial nature, so companies only have these rights in China if they register within the country. Licensing of intellectual property, with the correct license agreements, is the key for European companies to keep the ownership of their IP.

Automotive - Entering a New World in China

By DR. MARCO HECKER, ZHOU QUAN, JENS EWERT

With the advanced applications of information communications technology (ICT), development of new energy, rapid advances in artificial intelligence, and industry convergence driven by innovative technology, the traditional auto industry is facing unprecedented opportunities and challenges.

The industry is transforming: the rise of a new auto civilization and concepts such as intelligence, e-tron, internet connectivity and the sharing economy move from concepts to practical applications. A new pattern of competition is reshaping the industry in China – accelerated by government regulations sparked by environmental concerns.

Take 2018’s Auto China as an example where. 14 countries and regions (including China, the US, UK, Japan, France and Germany,) as well as 2,000+ manufacturers participate. More than 1,100 models including 88 new energy vehicles and 77 concept cars were brought to the event’s stages in Beijing, matching its theme, “Defining New Auto Life”.

This shows user experience is at the top of auto companies’ minds. Customer requirements are increasingly diversified and complicated. Consumers want cars that bring them a unique lifestyle, not just a good-looking transportation tool.

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Autonomous Driving and the NEV Market

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According to the 2018 Deloitte Global Automotive Consumer Study, car buyers have a growing interest in autonomous technology that can free up driving time with guaranteed safety and a reasonable price to enhance their driving experience.

Some 88 percent of customers rate in-car experience as an important factor when choosing a vehicle. They also desire highquality communication and an efficient purchase process. Meanwhile, new energy vehicles (NEVs) are widely accepted by  Chinese customers, much more so than anywhere else in the world, indicating great potential for this market, suggesting it is expected to become increasingly competitive in the near future.

In the first quarter of 2018, new passenger cars sale in China grew 2.56% to 6.1 million units – a slight increase even taking into account the end of the small engine subsidy policy. However, several original equipment manufacturers (OEMs) did not do well in the first quarter, including the traditional market leaders. This suggests foreign OEMs face severe challenges in a stable market.

During the same period (Q1 2018), sales of new electric passenger vehicles (hybrid as well as full-NEV) hit almost 130,000 units, representing 152% YoY growth. This growth was mainly fueled by Chinese brands, showing the NEV market is on the rise as expected. It is important to note that all leading Chinese EV OEMs are domestic brands and many have declared they will join the game, especially “new OEMs”. A couple of foreign enterprises also entered the market by establishing joint ventures, but their progress already lags behind domestic players.

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China’s Auto Industry Policies

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In early April, China’s President Xi Jinping announced that the Chinese auto industry will be fully opened to foreign investment. The implementation of this huge policy shift will happen in three phases:

• First, in 2018, China will remove foreign ownership limits on NEVs and special purpose vehicle joint ventures (JVs).
• By 2020, the cap on foreign ownership of commercial vehicle manufacturers will be lifted.
• Then, by 2022 foreign automakers will be allowed to have full ownership of their local passenger vehicle makers. Meanwhile, the rule that any foreign firm can have no more than two joint ventures will be scrapped as well.
• After a five-year transition period, all restrictions on foreign ownership in the auto industry will be removed.

The timing of this announcement is interesting:
China’s petroleum fuel car sales are hitting a ceiling and heavy investment is required in new arenas such as NEVs, connectivity and ecosystem integration. Lifting the JV restriction will not only allow foreign capital to invest in NEVs, but is also an attempt to sell the assets of Chinese State Owned Enterprises (SOE) in the petroleum car industry at the highest price.

The recent series of events shows the government’s stronger determination to push industry transformation at a faster pace and with greater support. Changes on the policy offer more flexibility to foreign OEMs but might be a strategic investment trap (investment in a stagnant segment vs. investment in a growing segment). It is worth noting that most JV OEM contracts will be terminated around 2030. Foreign OEMs buying their share from JV partners will need to be cautious, and investing in the NEV sector appears more attractive.

Meanwhile, new players are entering the mobility ecosystem and penetrating the traditional auto industry value chain.

Alibaba set-up a JV, Banma, with SAIC three years ago focusing on vehicle connectivity and its application was first installed on SAIC’s Roewe RX5 in 2017. Tencent has announced deep cooperation with Chang’An and GAC in developing car connectivity, and Baidu is cooperating with Chery. Interestingly, foreign OEMs, which lack local resources in this ecosystem, have not been seen in this type of cooperation. Instead, they are seen as more inclined to maintain in-house development.

This is not only because of the very long decision-making process of entering a JV, but also concerns about ability to control the future ecosystem. Foreign OEMs prefer to have full control of customer interfaces and position BAT as traditional vendors rather than strategic partners, which can slow cooperation. However, from a customer perspective, a BAT ecosystem is more attractive and delivers a much better user experience , as it links to a user-adapted APP experience. For example, when customers first sit in the Roewe RX5 driver seat, they can easily log into the Banma system with their Taobao IDs, and all recorded user preferences will be synchronized to the vehicle. This saves a great deal of time versus using a brand new in-vehicle system.

Most OEMs’ self-developed connected systems are merely information silos that are not connected to customers’ life experience ecosystem. For OEMs, if data is not linked to an identified user and properly analyzed, its value will be undermined in potential monetization opportunities.

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What’s to Come for Foreign OEMs

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To grasp the growth opportunity, we would suggest foreign OEMs not only enter NEV competition but also join with vigorous local partners and eye new business models such as contract manufacturing and other models of collaboration.

First, foreign OEMs should find a good partner to explore new businesses with – and these do not necessarily need to be gasoline car OEMs. Although many non-Chinese OEMs are not yet very strong in global NEV competition, innovative partnering models will give them better leverage in negotiations with local ecosystem players like BAT.
BAT, meanwhile, seeks big names for cooperation to internationalize its business, and non-Chinese OEMs with strong global networks and resources could fit well into this ambition.

To win in the future, we believe in-car experience is more important than pure steel. Local Chinese OEMs have accumulated manufacturing know-how which allows them more time to focus on customer experience design. Contract manufacturers are changing from a “heavy” to “light” business model, backed by the confidence of capital market investors. Meanwhile, the revenue stream is shifting from one-off new car sales to subscription-based services, driven by user data. The key enabler of this change is data generated from cars and users being incorporated and ecosystem instead of staying in silos.

The China auto industry presents many new opportunities and calls for more action to strengthen communication and collaboration among local players as well as intensive attention on diversifying customer experience development.

 

Further Information

Dr. Marco Hecker

Dr. Marco Hecker is Partner at Deloitte China Automotive Industry Leader. He can be reached at mhecker(at)deloitte.com.hk 

Jens Ewert

Jens Ewert is Partner at Deloitte China MNC Program Leader. He can be reached at jensewert(at)deloitte.com.cn

Zhou Quan

Zhou Quan is Associate Director at Deloitte China Automotive Consulting. He can be reached at qzhou(at)deloitte.com.cn


About Deloitte China: The Deloitte brand first came to China in 1917 when a Deloitte office was opened in Shanghai. Now the Deloitte China network of firms, backed by the global Deloitte network, deliver a full range of audit, tax, consulting, and financial advisory services to local, multinational, and growth enterprise clients in China.

Feature 1 - Prevention and Crisis Management: Need to Know for German CEO’s and CFO’s in China

Interview with Philipp Senff, Partner at CMS China

By OLIVIA HELVADJIAN
Chief Editor German Chamber Ticker

The German Chamber Ticker team had the opportunity to talk to Mr. Philipp Senff,  Partner and Head of Compliance at CMS China.
He is recognized as leading corporate, compliance and risk management lawyer with over 15 years’ of China-related business experience. He has extensive experience in advising multinational companies, international banks and entrepreneurs of a wide variety of industries on mergers and acquisitions, corporate law, joint ventures and the restructuring of business operations in China.

“Governance, Risk and Compliance Management in China”. This is the title of  your new book. What is the purpose and key content of this book?

The book has been written by a team of 30 authors, who are senior executives from leading multinational companies. Research institutes also participated in this book project, including Stanford Law School. They share their real life insights for navigating foreign businesses successfully through the Chinese regulatory environment. Key focus is the prevention of corporate and personal liability risks through tools of transparency, prevention and crisis management. We have added checklists and case studies for easier understanding.

Where do we stand today with the Chinese anti-corruption campaign?

Individuals and companies have been sanctioned due to corruption. This applies to both Chinese and foreign citizens, Chinese and foreign-invested companies, and applies to both the public and private sector.

Is the anti-corruption campaign still running or is this topic, meanwhile,  completed? In other words, is compliance still a challenge in China?

There are three key drivers, which show that compliance and risk management is getting actually more important for foreign companies in China. Foreign companies need to watch out for these drivers.

Which drivers do you mean? Please start with the first driver.

Compliance is not limited to the prevention of corruption. Recent developments show that the Chinese regulator is not only enforcing the anti-corruption regulations more strictly. Other corporate crime matters in conjunction with e.g. fraud and money-laundering have been also more strictly prosecuted. Further, compliance is not limited to corporate crime matters. Product compliance, environmental, health and safety compliance, and other matters are also on the compliance agenda of the Chinese regulator. Cyber security compliance is also getting more important. Example: foreign companies, which are rolling out their digital sales strategies in China, for example with smart phone apps, need to be compliant with Chinese cyber security laws for mitigating their liability risks.

What is the second driver?

Foreign regulators are responding to the globalization of the business with anti-corruption laws in their jurisdictions, which have an exterritorial effect. These anti-corruption laws shall also apply to non-compliance conducts abroad, such as China. Examples are the US Foreign Corrupt Practices Act, the UK Bribery Act and to a certain extent the German Criminal Act. That means, that US, UK and German anti-corruption laws can apply also to non-compliance incidents in China.

The book explains in detail to which extent US, UK and German compliance laws apply to non-compliance incidents in China. Those foreign regulators are entitled to investigate within their jurisdictions against corruption and other misconducts and may impose sanctions on the offenders.

Some foreign regulators provide personal supervisory duties for the management at the headquarters level abroad in conjunction with their business in China, and non- compliance with these personal supervisory duties could trigger high personal compensation liability risks of the affected management towards the parent company abroad. Investigation and sanctioning of misconducts is getting international. Recent cases show that this is not a theoretical risk anymore. Foreign businesses operating in China need to develop compliance and risk management strategies, which reflect both Chinese and the relevant foreign laws.

What does it mean for the German businesses in China?

The topic “China Compliance” is not a topic of the local management in China anymore. German laws show that the Group CEO and Group CFO on the headquarter level have a personal interest in strictly mitigating their personal liability risks in conjunction with wrongdoings abroad, such as in China.

Do you have an example?

Look at the court case from 2013. This case deals with personal compensation risks of a board member in a German stock corporation towards the stock corporation in  conjunction with corruption payments abroad. The compensation claims are governed by German laws. The German Stock Corporation Act provides that the board member (Vorstand) has under certain legal requirements personal compliance duties with regard to the business in Germany and abroad.

Breaching this compliance duty can lead under certain requirements to high personal compensation claims, which can be raised by the stock corporation against the board member.

The decision of the Munich Regional Court from 2013 shows that this personal liability risk is a real risk. In that case, a large German company filed successfully a lawsuit against its former CFO claiming for personal compensation of EUR 15 million in conjunction with corruption payments abroad. The stock corporation has alleged that the former CFO breached its personal compliance duties as Vorstand in conjunction with these corruption payments.

The decision of the Munich Regional Court is not connected specifically
to China. However, it is irrelevant from the German law
perspective, in which country corruption payments have been conducted.
Therefore, such a personal liability risk can also arise in conjunction
with corruption in China. Sitting on a board in Germany can
therefore not exempt from personal liability risks in conjunction with
misconducts in China.

What is the third driver?

The liability risks by the Chinese and foreign regulators have been increased due to the rise of whistleblower allegations worldwide. Whistleblowing is getting easier given that  companies are increasingly setting up whistleblower lines and ask staff and business
partners to use it. Further, the Chinese regulator provides rewards to whistleblowers.

Foreign businesses operating in China need to get familiar with the ongoing regulatory development in conjunction with whistleblowing. CEO’s and CFO’s, no matter whether they are running the business in China or abroad, face an increasing level of personal liability risks in conjunction with disclosure, reporting and risk prevention obligations under Chinese laws and the applicable foreign laws.

How looks a typical compliance case on your desk?

We see often that the affected company is losing money. Purchase is too expensive or sales are too cheap. Purchase got expensive given that staff of the company has  interposed their own companies in order to generate personal benefits. On the sales side, fake distributors have been interposed, given that they belong to the staff of the company. The margin of the company is going down.

Is this a China specific risk?

No. These are global risks.

Where do you see differences between China and
let’s say Germany?

Key differences are on the response side. That means how you set up a solid compliance management system and a robust crisis management. The regulatory environment is important.

Do you have an example?

The Chinese Criminal Law provides sanctions on companies for misconducts. Companies in China, including German-invested enterprises, can be fined and imposed with additional sanctions. This is very different from Germany given that the German Criminal Law provides sanctions on the individuals, but not on companies. This regulatory difference is important given that it puts the subsidiary at risk. These regulatory differences must be reflected in the compliance management system in China.

What does that mean for the German business in
China?

German companies in China need to demonstrate that the misconduct from a single or few employees, is not the misconduct from the company, to avoid corporate sanctions under the Chinese Criminal Law. Companies, no matter whether they are Chinese or foreign-invested, must undertake significant efforts, in order to show this red line.

How does this affect German CEO’s and CFO’s in
China?

If they defend their businesses against compliance risks, they will also defend themselves against personal liability risks. Showing this red line is important. If the risks are known, they can be mitigated. If the risks are hidden, business reviews are getting more important to get transparency.

What are your three key recommendations for compliance and risk management strategies in China?

First: Compliance is more than prevention against corporate crimes. We have previously spoken about this.

Second: The compliance-jetlag must be avoided. Businesses must avoid that the  compliance program is perceived as unnecessary bureaucracy. This acceptance risk can be mitigated if compliance and risk management tools will be simplified in order to avoid enormous bureaucracy - but without lowering the compliance standards of the company. This is a difficult management task.

Third: Get familiar with the “black swan” theory by Nassim Nicholas Taleb. Taleb states in his book that, if you forecast the future based on past developments and experiences, you will run the risk to overlook unknown scenarios. Taleb gives the example with the swans. If you have seen in your life only white swans, you will suppose that all swans are white until you have seen a black swan. This swan theory can be also reflected in the corporate risk management in China.

What do you recommend from a risk management perspective to those foreign companies in China, which are currently subject to business transformations given that they adjust their business?

Business transformations, especially liquidations, in China can quickly lead to dynamic scenarios, where hidden compliance risks could arise, and are getting difficult to manage. The actual risk profile of the company could be unclear given that the previous local management was less interested in mitigating the company’s liability risks, and the headquarter’s management did not realize that certain hidden risks actually exist.

Hidden risks are usually connected to non-transparent procurement and sales practices of the company. Restructuring plans could get hit if those risks arise. These scenarios can be avoided by an early risk audit or business review. Risk audits can help to screen first the actual risk profile of the operation in China, and will be then used as a solid basis for the mitigation of the identified risks.


Thank you for the interview, Mr. Senff.

Feature 2 - Economic and Policy Outlook Q1 2018

Policy Update: The Two Sessions – More Party, More Xi

Following the 19th National Congress of the Communist Party of China, held in October last year, also the first session of the 13th National People’s Congress and the first session of 13th National Committee of the Chinese People Political Consultative  Conference (CPPCC) – the Two Sessions – concluded successfully in March this year. The Two Sessions review and implement policies and changes discussed during the previously held Party Congress. This year’s sessions were the first to open under the guidance of “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era”. Particularly, China’s 2018 government work report was outlined, the country’s constitution was amended, a new national supervision commission was established, the government organizations were restructured, and new government officials were elected. What happened exactly and what are the implications for China’s economic and business environment?

By JOSIPA MARKOVIC

2018 government work report – China’s 10 key target numbers

China’s government work report lays out economic targets for the country in the coming year. Besides its focus of making China a country of innovators and its emphasis of a more effective opening up strategy, the report outlines the following ten key numbers, indicating the country’s top priorities for 2018.

1. 6.5% GDP growth
China has set its 2018 GDP growth target at around 6.5% – the same target as for 2017, however representing a slight alleviation form last year’s “6.5% or higher if possible”. With an annual growth rate of 6.3%, China is expected to achieve its goal of doubling GDP and per capita income by 2020 from 2010 – a target set six years ago by former China President Hu Jintao.

2. Consumer Price Index of around 3%
China continues to target a consumer price inflation (CPI) of 3%, promoting robust  consumer demand with the aim to reshape its economic model to a more sustainable consumer driven one.

3. Budget deficit of 2.6%
China set a 2018 budget deficit target of 2.6% of GDP, 0.4 percentage points (p.p.) below last year’s mark. However, even if the country is pushing to resolve financial risk and particularly, to control debt risk at the local government level, the lower deficit target does not mean that government expenditure will slow down. According to the Ministry of Finance, China will pursue a proactive fiscal policy, and the absolute amount of the deficit is expected to remain unchanged at 2.38 trillion RMB.

4. Creating over 11 million urban jobs
China aims to create 11 million urban jobs in 2018. China’s working age population is expected to account to 15 to 16 million, according to Caixin global, hence a further job creation of 11 million is crucial to keep a low unemployment rate.

5. Reducing energy production by three percent
In the move to better address pollution issues, China aims to reduce energy consumption by three percent per unit of GDP, and to achieve a continuous reduction of the PM2.5 density.

6. Reducing steel production by 30 million tonnes
One of China’s major focuses is to step up its supply-side structural reform. Therefore, the country aims to clamp down inefficient supply by reducing steel production capacity by 30 million tonnes and coal production by 150 million tonnes.

7. Reducing taxes by 800 billion RMB
The Chinese government committed to reduce taxes on businesses and individuals by more than 800 billion RMB. A first part of the tax cut was already announced in March this year, reducing the value-added tax on manufacturing to 16% from 17%, while the rate on transportation, construction, and telecommunication services is decreased to 10% from 11%, starting 1 May.

8. 13 million new permanent urban residents
The country is committed to pursue a better-quality urbanization, improving public transport and registering 13 million people as permanent urban residents.

9. Reducing poor rural population by 10 million
One of the key focuses of Xi Jinping’s second five-year term, is to gradually lift China’s rural residents out of poverty. Accordingly, the poor rural population shall be reduced by over 10 million, including a total of 2.8 million people that shall be relocated from inhospitable areas in 2018. Measures to be taken include the development of local industries, education, healthcare and enlarging a central poverty reduction fund.

10. Renovating 5.8 million homes
China is willing to further improve housing conditions for the poor, launching a new three-year renovation plan to revamp housing in run-down urban areas, starting by renovating 5.8 million homes in 2018.

Amendment of the constitution

The National People’s Congress (NPC) adopted 21 amendments to the Chinese Constitution on 11 March 2018. Among the main changes are the embedding of the Xi Jinping Thought, the abolishment of the presidential term limits and the establishment of the National Supervisory Commission. Moreover, the country put through a massive government reshuffle.

  • The enshrinement of the “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era,” – a political ideology that highlights the primacy of the Chinese Communist Party, strengthening its power at all levels of society. Since Mao Zedong, no other leader has ever had his ideology with his name on it included in the constitution, while being in office.
  • Moreover, the National People’s Congress overwhelmingly approved the constitutional change to remove presidential and vice-presidential term limits – with only two opposition votes, three abstentions, while the rest of the almost 3000 members voted in favor. Deng Xiaoping, China’s leader after Mao Zedong, had imposed a presidential two-term limit in the 1980s. Now, with the abolishment, president Xi Jinping could theoretically rule for life. While critical voices – largely from foreign experts – warn that China is making a move back to an autocratic personalist system, advocates say the change will give Mr. Xi more room to push forward with economic reforms, cracking down on pollution and financial risk.

Government reshuffle

China put through a massive government reshuffle, with the aim to make the government more efficient, strengthening its functions on economic management, market supervision, social and environmental protection, etc. After the restructuring, the government will be reduced by eight ministerial-level entities, accounting to 26 ministries and commissions. Among the biggest changes are the merging of China’s banking and insurance regulators and the promotion of the People’s Bank of China (PBoC, China’s central bank) to ministerial level – showing the increased focus on financial stability. The central bank will be drafting key regulations, while the merged regulators will be in charge of its implementation. Moreover, a new anti-graft commission was established, the so called National Supervisory Commission, overseeing all public-sector employees. Furthermore, the NPC sessions elected new state leaders, with Xi Jinping being reelected as the Chinese President and Chairman of the Central Military Commission, surrounded by state leaders and ministry heads loyal to him.

What does it mean for us?

During the Two Sessions, China established a more efficient governmental structure and announced a stronger push toward its supply side structural reform. Moreover, the country committed to improve the business environment – by lowering costs of doing business through an implementation of tax reductions, and by further opening up to more sectors, particularly the manufacturing, financial, health care industry as well as education and elderly care. Moreover, China’s emphasis to strengthen consumer demand and to push forward on its ambition to become an innovation leader, continues to create opportunities for businesses in the retail as well as in the high-tech sector.

While some of these commitments have already become more concrete (i.e. communication of: abolishment of foreign ownership limits on new energy vehicle joint ventures (JV) by 2018, on commercial vehicle JV by 2020 and on passenger vehicle JV by 2022; lowering tariffs on imported vehicles and other consumer products; cancelation of foreign equity restrictions on banks and financial asset management firms; removal of tariffs on imported cancer drugs from 1 May 2018, etc.) it is important to keep an eye on those proposed reforms, since it was shown in the past that the Chinese government issued various documents to promote its opening up strategy, but with limited results. Furthermore, while increased investments in high-end industries can create opportunities for foreign businesses, it also means more competition from local Chinese players. Moreover, the changes to the constitution all point to one direction: strengthening the role of the communist party, which could have regulatory and administrative consequences.

Economic Update: Strong First Quarter Growth in 2018 Despite Trade Tensions

China’s economy continues to grow strong in 2018, reporting a GDP growth rate of 6.8% for the first quarter 2018, topping expectations – a Reuters poll of 60 economists showed a consensus estimate of 6.7%.

The resilient growth was supported by strong consumer demand. Consumption accounted for 77.8 percent of economic growth in the first quarter 2018. In March, retail sales demonstrated doubledigit growth, increasing 10.1% from a year earlier, up 0.4 percentage points (p.p.) from the first two months of the year. However, economists expect a slight slowdown of the economic expansion along the year, as the Chinese government is cracking down on industrial pollution and financial risk. The growth of the country’s aggregate financing – the total volume of financing provided to domestic non-financial enterprises and households, published by the PBoC – reached a record low during recent months. “Since credits are crucial for investment driven sectors, it makes sense to expect a slowdown of traditional growth drivers, such as investment and heavy industries”, the Commerzbank in their recently published economic outlook reports. This year’s March figures may be a first indication for the anticipated slowdown:

Key economic indicators pointing to anticipated slowdown

March industrial output increased by 6% year over year (yoy), 1.2 p.p. down from the first two months in 2018. Fixed asset investment rose 7.5% yoy, cooling from 7.9% in the January-February period.

Also, producer as well as consumer price inflation eased sharply in March. The producer price index (PPI) rose 3.1% in March from a year earlier, 0.6 p.p. below the February mark. The consumer price index (CPI) increased 2.1% from a year earlier, well below February’s 2.9% increase. According to Reuters, the decline in consumer prices represents mostly a correction of food prices after the spring festival, while demand remains fairly robust. However, the decline in producer prices could point to an eventual slowdown of China’s economy as demand for industrial goods decreases – driven by rising borrowing costs and a cooling property market, triggered by Beijing’s crack down on debt risks.

Strong trade performance, amidst tensions with the US

China’s trade grew strong in the beginning of the year, with both imports and exports  showing double digit growth. For the first quarter as a whole, imports accelerated 18.9%, while exports increased by 14.1% from a year earlier. A dip in March exports – showing a 2.7% drop – lowered China’s overall trade surplus for the first three months. However, the trade surplus with the United States increased by 19.4%, unlikely to ease trade tensions between the two trade giants, Reuters reports. The China-US trade dispute,raising fears of an escalation that could harm the whole global economy, overshadows the outlook for China’s heavy industry as well its high-tech sector. Hence, even if the Chinese economy remained robust during the first quarter of the year, ongoing trade tensions with the United States will be a key determinant of how 9.5 the Chinese (and global) economy will further develop in 2018.

Further Information

Josipa Markovic is the economic analyst at the German Chamber of Commerce Shanghai. For all economic updates and information about surveys published by the German Chamber of Commerce,she can be reached at markovic.josipa(at)sh.china.ahk.de 

Feature 3 - Legal Update

Cross-border R&D Cooperation in the PRC

By DR. ULRIKE GLUECK AND MICHAEL MUNZINGER

Introduction

The People’s Republic of China (“PRC”) has become one of the most attractive destinations for research and development (“R&D”) investments in recent years. This is reflected by a fast growing number of R&D centers, the large amount of Intellectual Property (“IP”) filings in particular by Chinese individuals and domestic Chinese companies and steady investments by multinational corporations in the high technology sector. The PRC’s strategic emerging industries are growing swiftly, including clean energy, environmental protection, information and communication technology, AI, biomedicines, high speed trains, aeronautics, high-end manufacturing, etc. Also in areas such as academic publications, the PRC is showing constantly increasing numbers.

With the aim of transforming the traditional manufacturing focused economy into a high-technology economy, R&D has gradually become one of the top priorities for the Chinese Government. In order to further enhance such transformation, R&D investments are often supported by subsidies and preferential tax treatments.

While doing R&D in the PRC offers promising opportunities regarding research results, product development, localization and overall growth, many foreign companies still find it difficult to succeed in the PRC business environment. Especially for cross-border cooperation in R&D with Chinese partners, there are a lot of potential pitfalls and risks to be considered. A thorough research of the Chinese market, its legal and regulatory systems as well as the business culture is essential for successful R&D projects in the PRC. In the following, we will highlight certain key legal and regulatory aspects.

1. Legality of R&D activities in the PRC

A R&D agreement concluded by a foreign party and a Chinese party (“Foreign-related R&D Agreement”) is subject to the PRC Foreign Trade Law and the PRC Administrative Regulations on Technology Import and Export (“TIE Regulations”). R&D activities involving foreign entities are considered as technology import or technology export (as the case may be). Not all R&D activities can be conducted. Under the TIE Regulations, technology is divided into three categories, i.e. technology which is:

- free to be imported and exported;
- subject to import and export restrictions; and
- subject to import and export prohibitions.

Lists of types of technology the import or export of which is subject to prohibition or restrictions are formulated and published by the PRC Ministry of Commerce. The development of technology which falls under the prohibited category is banned. The development of technology which falls under the restricted category is subject to approval by the local Authority of Commerce. It is recommended that, for compliance reasons, contracts regarding the development of technology which is free to be imported and exported is registered with the local Authority of Commerce (however, this is no prerequisite for the validity of such contract anymore).

On 18 March 2018, the General Office of the State Council published the Working Measures for Outbound Transfers of Intellectual Property Rights (for Trial Implementation) which entered into effect at the same day. According to these measures, for certain outbound intellectual property transfers from Chinese individuals or entities to foreign individuals or entities, the competent authorities shall check the impact on national security and the PRC’s capability of innovating and developing core and key technologies in significant areas. The practical implication of such new regulation is not clear yet and should be further observed.

2. Eligibility of a PRC company to conclude a R&D agreement

Under the PRC Foreign Trade Law, a Chinese party is allowed to sign a Foreign-related R&D Agreement with a foreign party only if the Chinese party is registered as a foreign trade operator with the competent Authority of Commerce. If the Chinese party has not been registered as a foreign trade operator, it has to entrust a registered foreign trade operator to act as its agent to sign the Foreign-related R&D Agreement on its behalf.

3. Types of R&D agreements under PRC law

The PRC Contract Law provides for two types of R&D agreements, i.e. cooperative R&D agreements (“Cooperative R&D Agreement”) and commissioned R&D agreements (“Commissioned R&D Agreement”). In a Cooperative R&D Agreement, the parties (i) jointly invest in the R&D, including investments in the form of technology, and (ii) cooperate and jointly participate in the R&D in accordance with their allocated tasks. In a Commissioned R&D Agreement, the R&D is carried out by only one party and is entrusted by and financed by the other party.

4. Ownership of the development results under a Cooperative R&D Agreement

According to relevant stipulations of the PRC Contract Law and the PRC Patent Law, if the development results are patentable, unless otherwise agreed by the parties, the parties have the right to jointly apply for registration of the development results as patent. When the patent is granted, the parties are joint owners of the patent. In addition unless otherwise agreed by the parties, the parties have the following rights and obligations:

- if a party refuses to apply for registration of the development results as patent, the other party is not allowed to do so alone;
- if a party waives its right to apply for registration of the development results as patent, the other party is allowed to do so without involvement of the waiving party. After a patent is granted, the waiving party is entitled to use and exploit the patent free of charge; and
- if a party transfers its right to apply for registration of the development results as patent, the other party has priority to obtain such right from the transferring party under the same conditions.

According to relevant stipulations of the PRC Contract Law and the Interpretation of the Supreme People’s Court on Some Issues Concerning the Application of Law in the Trial of Technology Contract Dispute Cases, if the development results are non-patented, such as know-how without patent registration, unless otherwise agreed by the parties, the know-how is owned by the parties jointly. The parties have the following rights and obligations:

- each party may use the know-how without the consent of the other party; and
- each party may grant a general license to a third party to use the know-how without the consent of the other party. General license means that, despite of the licensing, the licensor can exploit the know-how by itself or authorize a third party to exploit the licensed technology.

However, neither party may transfer the know-how to a third party or grant an exclusive or sole license to a third party to use the knowhow without the consent of the other party.

The above statutory regulations are not mandatory. I.e. in the contract, the parties can agree on different stipulations. In many cases, it is recommendable to do so.

5. Ownership of the development results under a commissioned R&D Agreement

According to relevant stipulations of the PRC Contract Law and the PRC Patent Law, if the development results are patentable, unless otherwise agreed by the parties, only the developer has the right to apply for registration of the development results as patent. When the patent is granted, the developer is the owner of the patent. However, the commissioning party has the following rights:

- after a patent has been granted, the commissioning party is entitled to use and exploit the patent free of charge; and
- if the developer transfers his right to apply for registration of a patent, the commissioning party has priority to obtain such right from the developer under the same conditions.

If the development results are non-patented, such as know-how without patent registration, unless otherwise agreed by the parties, the statement under item 4 above applies respectively with regard to the developer and the commissioning party. In addition, the developer is prohibited from transferring the know-how to any third party before he has delivered the development results to the commissioning party.

Again, the above statutory regulations are not mandatory. In the contract, the parties can agree on different stipulations. If the for foreign company is the commissioning party, it is also advisable to agree that any rights to the development results are owned by the commissioning party.

6. Protection of patentable development results in the PRC

The PRC is a member of several international treaties, including the Paris Convention for the Protection of Industrial Property (“Paris Convention”), the Patent Cooperation Treaty (“PCT”) and the Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”). Inventions, utility models and industrial designs can be registered and protected as patents in the PRC. The following major issues need to be considered when applying for a patent protection in the PRC:

- Any foreigner or foreign enterprise may apply for registration of a patent in the PRC on basis of a bilateral agreement, an international treaty or the principle of reciprocity. For example, since both Germany and the PRC are members of the Paris Convention, German enterprises and individuals are entitled to apply for registration of their patents with the PRC State Intellectual Property Office (“SIPO”);
- First-to-file rule: If two or more applicants file patent applications for an identical invention, the patent will be granted to the applicant who submitted the application first;
- In order to be eligible for patent protection, an invention or a utility model must possess the characteristics of novelty, inventiveness and industrial applicability. In order to be eligible for patent protection, an industrial design must, in addition to the above characteristics, not conflict with any other person’s previously acquired legitimate rights;
- An application for an invention patent is subject to substantial examination. The SIPO will check whether the invention meets the patentability criteria, and in particular whether it has the properties of novelty, inventiveness and industrial applicability. Due to this detailed examination, registration of an invention patent can be time consuming and expensive. An application for a utility model patent or an industrial design patent is only subject to a preliminary examination. The SIPO will merely check whether the filing documents comply with the formal requirements stipulated in the PRC Patent Law. Therefore, registration of a utility model patent or an industrial design patent will typically be completed within 1 year from the date of application;
- The term of protection of an invention patent in the PRC is 20 years and that of a utility model patent or an industrial design patent is 10 years. This term is calculated from the date of application and non-extendable;
- After the granting of a patent, the patentee is entitled to prohibit others from exploiting its patent.

7. Protection of non-patented development results in the PRC

Unlike a patent, know-how is not subject to any registration in the PRC. It is usually protected by entering into a non-disclosure agreement. However, if the know-how meets the following conditions, it can be protected as a trade secret under the PRC Anti-Unfair Competition Law:

- it is not known to the public;
- it has commercial value; and
- the owner of the know-how has taken measures to maintain its secrecy.

The following unfair competition activities are prohibited under the PRC Anti-Unfair Competition Law:

- obtaining a trade secret by theft, bribery, fraud, intimidation or other improper means;
- disclosing, using or allowing a third party to use a trade secret obtained by the means mentioned in the preceding item; and
- disclosing, using or allowing a third party to use a trade secret in breach of an agreement or the requirements of the owner of the trade secret on keeping such trade secret confidential.

Where a third party knows or should know that any of the above mentioned acts have been done with respect to a trade secret but still obtains, discloses, uses or allows any other to use such trade secret, such practice shall be deemed as infringement upon the trade secret.

8. Protection of licenses in the PRC

Licensing is a popular instrument for the exploitation of R&D development results. There are three types of licenses under PRC law, i.e. exclusive, sole and general license. Exclusive license means that only the licensee can exploit the licensed technology and also the licensor can neither exploit it by itself nor authorize any third party to exploit the licensed technology. Sole license means that both the licensor and the licensee can exploit the licensed technology, but the licensor cannot authorize any third party to exploit the licensed technology.
General license means that, despite of the licensing, the licensor can exploit it by itself or authorize other third parties to exploit the licensed technology. PRC law grants a large amount of autonomy to the key terms of a licensing agreement such as territory, duration and type of the license, scope of the licensed technology, royalties, warranty claims, limitation of liability etc.

However, the following restrictive clauses in a license agreement are invalid under PRC law:

- requiring the licensee to accept additional conditions which are unnecessary for the license, including purchasing unnecessary technology, raw materials, products, equipment or services;
- requiring the licensee to pay royalties or to assume relevant obligations for expired or revoked patents;
- restricting the licensee to improve the technology provided by the licensor or to use such improvements;
- restricting the licensee on acquiring similar or competitive technology from other sources;
- unduly restricting the licensee from purchasing raw materials, parts and components, products or equipment from other channels or sources;
- unduly restricting the quantity, variety or sales price of the products that the licensee produces; or
- unduly restricting the licensee from utilizing the channel for exporting products manufactured using the imported technology.

9. Tax aspects

Scenario I – both the foreign party and the Chinese party jointly do the R&D work
Both the foreign party and the Chinese party share the R&D costs according to their own contribution to the R&D work. In such case, a cost sharing agreement shall be concluded between the parties. The shared costs shall match each party’s income derived from the R&D result and the cost sharing agreement should be recorded with the PRC tax authorities.

Scenario II – the foreign party commissions the Chinese party to do the R&D work
If the R&D result is owned by the Chinese party, the compensations charged from the Chinese party to the foreign party shall be treated as royalties. If the R&D result is owned by the foreign party, the compensations charged from the Chinese party to the foreign party shall be treated as R&D service fees. Both royalty incomes and service incomesare subject to PRC VAT and various surcharges linked to VAT at around 6.8%. Under PRC tax law, the above VAT and surcharges can be exempted if the R&D Agreement has been registered with the competent PRC Science and Technology Authority as a technology development agreement or a technology transfer agreement. These incomes should also be treated as the Chinese party’s taxable incomes for PRC Corporate Income Tax (“CIT”) purpose.

Scenario III – the Chinese party commissions the foreign party to do the R&D work
If the R&D result is owned by the Chinese party, the compensations charged from the foreign party to the Chinese party shall be treated as R&D service fees. If the R&D result is owned by the foreign party, the compensations charged from the Chinese party to the foreign party shall be treated as royalties.

10. Dispute settlement

Civil legal disputes which are not resolved through negotiations and amicable settlement between the parties can generally be finally resolved by either litigation or arbitration. Litigation refers to legal procedures brought to the ordinary courts of a country while arbitration provides for private arbitration tribunals.

Under a R&D Agreement, the parties may either choose a court or an arbitration institution to resolve a dispute. In Foreign-related R&D Agreements, the parties are allowed to choose a foreign court or a foreign arbitration tribunal. However, due to a lack of international treaties and reciprocity, judgments of many foreign, e.g. German, courtsare not enforceable in the PRC. PRC People’s Courts further sometimes still tend to protect the local party compared to a foreign party. Therefore, in many cases, arbitration is preferable compared to litigation. Foreign arbitral awards are generally enforceable in the PRC on the basis of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

In R&D Agreements without a relevant foreign element, it is not possible to agree on a foreign court or a foreign arbitration institution under PRC law. In such case, arbitration before a Chinese arbitration institution such as CIETAC, SHIAC or Beijing Arbitration Commission is often a good alternative.

Further Information

 

Dr. Ulrike Glueck is Managing Partner of CMS, China.
Michael Munzinger is Senior Associate at CMS, China.
Ranked as a Top 10 Global Law Firm, CMS can provide a full range of legal and tax service in 42 countries with 74 offices. Together with more than 4,500 CMS lawyers worldwide, CMS China (Shanghai, Beijing and Hong Kong) offers business-focused advice tailored to companies’ needs. For more information, please visit - https://cms.law/en/CHN/

Third “More than a Market Awards” Honor Corporate Social Engagement Projects

On 31st May 2018, for the third time, the German Chamber of Commerce in China and Bertelsmann Stiftung, supported by the German Consulate General Shanghai, awarded the More than a Market Award to five German projects to honor their outstanding social engagement in Chinese society.

Due to Asia’s, and especially China’s, rise and increasing importance for today’s multinational businesses, German companies are facing new challenges: On the one hand they need to demonstrate more global presence than ever, on the other hand they should adjust to the local market conditions and completely different cultures. Thus, the slogan “think global, act local” is relevant in this situation. In this context, it is decisive for the competitiveness of German companies, the Sino-German relationship, as well as for a healthy social development in both countries, to fill this concept with life in a successful and responsible way when doing business in China.

Against this background, the German Chamber of Commerce | Shanghai together with the Bertelsmann Stiftung and supported by the German Consulate in Shanghai launched the "More than a Market" initiative in March 2015 with the purpose to catalyze, bundle, and support social engagement of German companies in China.

To share learnings from this process and to make the achievements perceptible, the partners of the initiative intend to honor outstanding projects at an annual Award Ceremony in Shanghai.

Considering this, German companies with operations in Mainland China were able to submit applications for this year´s More than a Market Awards between October 2017 and February 2018.

This year, a full 100 applications highlighting inspirational CSR projects of German companies from all over China were received. The projects are covering a wide range of thematic areas, such as environment sustainability, healthcare and safety, internal CSR, poverty alleviation, sports, school and vocational education, supply chain sustainability, and social inclusion.

A Glance into the Winning Projects

This year, the 100 submitted projects were judged by an independent Chinese-German jury, based on criteria such as partner relationship, corporate competences, transferability, and sustainable impact. In addition to the small, medium, and large size enterprise categories, the special categories of "Outstanding Supply Chain Management" and "Social Inclusion" were honored this year.

Among the 31 short-listed finalists, the following five projects were honored for their exceptional cases of social engagement by German companies in China at the More than a Market Awards 2018:

In the category “Small Enterprises (1-500 employees in China)”, Ningbo Silk Trend Garments was chosen for its “PMX Summer Kindergarten” project, where children of migrant workers are reunited during the summer months with their parents, while enjoying trainings and activities such as excursions, arts and sports provided by the company.

In the category “Small Enterprises (1-500 employees in China)”, Ningbo Silk Trend Garments was chosen for its “PMX Summer Kindergarten” project, where children of migrant workers are reunited during the summer months with their parents, while enjoying trainings and activities such as excursions, arts and sports provided by the company.

In the category “Medium Enterprises (500-5,000 employees)”, Festo China received the award for their exemplary engagement in training and equipping Chinese participants for taking part in the world’s largest international vocational skills contest, the “WorldSkill” competition.In the category “Large Enterprises (more than 5,000 employees)”, BASF (China) received the award for their “BASF Kids Lab” project, which sparks young, inquisitive minds about natural sciences, especially chemistry, and helps children gain a practical understanding of science. In the category for “Outstanding Supply Chain Management”, METRO Jinjiang Cash & Carry was selected with their ‘Star Farm’ project – a food safety consulting project, which supports farmers in developing and implementing more sustainable farming techniques and a greater control of food safety and quality.

In the category “Large Enterprises (more than 5,000 employees)”, BASF (China) received the award for their “BASF Kids Lab” project, which sparks young, inquisitive minds about natural sciences, especially chemistry, and helps children gain a practical understanding of science.

In the category for “Outstanding Supply Chain Management”, METRO Jinjiang Cash & Carry was selected with their ‘Star Farm’ project – a food safety consulting project, which supports farmers in developing and implementing more sustainable farming techniques and a greater control of food safety and quality.

Acknowledging the overwhelming number of German companies engaged in social inclusion, the category “Social Inclusion” was additionally introduced. Changsha Bach’s Bakery was awarded this prize for its “Bach’s Bakery Program”, by employing, training and giving people with hearing impairments the opportunity to learn baking skills and gain financial independence by being fully integrated into a normal work environment.

For more detailed information on all the submitted projects, please download the More than a Market publication (in English and Chinese): http://www.morethanamarket.cn/

Encouraging Keynote Speeches

Just like in previous years, Ms. Liz Mohn, Vice-Chair of the Executive Board of Bertelsmann Stiftung, an important German private business foundation with the purpose to serve the common good, welcomed participants with an introduction speech. In her role as a leading female entrepreneur and dedicated philanthropist, Ms. Mohn emphasized that China is much more than a market to German companies – it is a home, a place for personal growth and most importantly a place that German companies want to positively impact. Therefore, the More Than a Market initiative is one such avenue for affecting positive change in the business world and beyond through an array of meaningful projects.

“The More than a Market initiative exemplifies how successful German-Chinese cooperation can do its part to bring the world closer together. Only together we can work towards a better future based on shared values.” - Liz Mohn

The event was honored to welcome Ms. Rosaline May Lee, Dean of Entrepreneurship and Management at Shanghai Tech University as keynote-speaker at the Awards Gala. Ms. Rosaline May Lee held an inspiring speech about the role of companies as important institutions to give back to their surrounding environment and contributing with relevant projects and initiatives. She was impressed by the vast amount of submitted projects and the meaningful purposes they stand for.

Saying Farewell to Mr. Rolf Koehler

At the end of the event, it was with a heavy heart that Ms. Bettina Schön-Behanzin and all who have been involved with More than a Market had to say goodbye to one of its co-initiators, backbone, and driving forces. To honor his exceptional engagement and personal dedication to More than a Market, Mr. Rolf Koehler was presented with the “Award of Honor”. Among other things, Mr. Rolf Koehler served in previous years as the Chairman of the Steering Committee of the initiative and workshop leader. Mr. Rolf Koehler inspired many people whit his wholehearted and outstanding personal commitment to the initiative. In his farewell speech, Mr. Koehler extended a warm thank you for being part of the More than a Market initiative. He mentioned the humble beginnings of the initiative, and how it has grown to have such an impact on Chinese society. He also emphasized that all participating projects are winners to him.

The More than a Market Forum

The aim of the More than a Market initiative is to strengthen the good standing of the German industry in China by creating stronger relationships and partnerships between German and Chinese organizations. In this context, the More than A Market Awards aim to showcase the good practices of social engagement of German companies in China. In contrast, the More than a Market Forum provides a platform for sharing and developing best practices and peer-learning of social engagement by German companies in China. This year´s Forum was co-hosted by Ms. Simone Pohl, and Mr. Bernhard Bartsch, Senior Expert for the Germany and Asia program at Bertelsmann Stiftung, who presented the new More than a Market publication. In her opening speech, Ms. Liz Mohn, praised the successful development of the initiative, to reaching 100 submitted projects this year from companies which account for some 500,000 jobs in China.

Dr. Fang Jin, Senior Research Fellow at the Development Research Center of the State Council and Deputy Secretary General of China Development Research Foundation, honored the guests with a keynote speech at this year’s forum opening. In his keynote he stressed that the More than a Market initiative is a good opportunity to learn from one another, but it also serves as a catalyst and motivator to create new CSR projects. Therefore, the event is not only about giving out trophies but also to further catalyze and promote social engagement of German companies operating in China. Moreover, a Social Marketplace gave room to get to know seven NGOs and to meet potential cooperation partners for future CSR projects. During the More than a Market Forum, participants experienced a day filled with seven workshop sessions and two panel discussions on ways how to further expand social responsibility in China. The following workshops and panel discussions of the Forum gave room for idea sharing, project development and topical discussion on CSR:

DISABILITY AWARENESS

During the workshop Ms. Marina Kalnitski from the Inclusion Factory in Taicang and Ms. Wang Rui from the United Nations Development Programme demonstrated approaches to change attitudes and practices towards the greater inclusion of people with disabilities in employment. Discussed approaches were derived from the Disability Equality Training (DET), which was developed in Ireland in the early 1990s, and is now used by many UN agencies, MNCs, INGOs and others throughout the world. The participants were exposed to social dilemmas, concepts for promoting an equal society and methods for developing their operation into an inclusive environment for people with disabilities.

GERMAN-CHINESE INITIATIVE FOR SUSTAINABLE VALUE CHAINS

The workshop was hosted by Jana Heinze and Nadine Hoenighaus from econsense and supported by Karsten Hendricks from the Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG), as well as Zoye Chen, Wednesday Cui, and Hubertus Drinkuth from Systain Consulting GmbH. As German companies all over the world are striving to implement business practices that are both successful and sustainable, DEG actively focuses on creating prospects on the ground and facilitating sustainable development. During the interactive top-level workshop, the new German-Chinese Initiative for Sustainable Value Chains was introduced, and participants were provided with hands-on insights on the sustainability platform with continuous training for suppliers.

HOW TO TELL GOOD NEWS AND ATTRACT ATTENTION FOR YOUR CSR PROJECT

Dr. Evelyn Engesser from Unicepta and Dr. Stefan Justl from Storymaker provided research results, best practice examples and practical exercises to workshop participants to create communication that attracts public interest in CSR projects. As it gets increasingly difficult in today’s business environment to attract target audiences with CSR activities, the workshop was focusing on present trends in media coverage, communication strategies, and approaches that spark target groups’ interest.

SAP IDEA LAB: FROM IDEAS TO IMPLEMENTATION

For the first-time, the More than a Market Forum also had a Chinese language workshop to offer. The SAP Idea Lab was hosted by Anniwa Abulizi, Senior Product Localization Expert and Design Thinking Coach at SAP, and facilitated the development of new CSR projects by using design thinking methods. The SAP Idea Lab has been a key component of More than a Market to catalyze further social engagement of German companies in China. It provides support to companies and organizations who have strong intention to join forces for greater impact in Chinese society and develop a collaborative project. During the interactive workshop, participants were working together to sketch and develop collaborative project ideas. In this context, participants had to apply different methodologies to generate ideas, develop concepts and/or prototype a project on the topic of their interest.

MOTIVATE YOUR VOLUNTEERS: SOCIAL ENGAGEMENT WITHIN COMPANIES

The workshop was hosted by Dr. Sigrid Winkler from the German Chamber of Commerce | Shanghai and welcomed James Huang from Polymax Group, Lin Song from Fiducia, and Wu Qian from Freudenberg to share their experience with social engagement within companies. Volunteering in companies is an instrument to involve a big number of employees in CSR activities. The workshop was concerned with different models for volunteering programs (e.g. summer camps, volunteering platforms etc.) as best practice examples, and discussed the HR related effects on organizations, such as increased job satisfaction and better retention of employees.

The workshops were accompanied by two high-level panel discussions, which featured input from Chinese and German leaders and reflected on trends at the interface of business and society.

COOPERATION WITH NGOs: HOW TO MAKE IT WORK

Tim Wenniges from the Konrad-Adenauer-Stiftung Shanghai moderated a compelling panel discussion between Julia Guesten (Pfrang Association), William Lu (ForNGO), Stefan Ahrens (Kick-Off Football Project), Celina Chew (Bayer), and Dr. Fang Jin (China Development Research Foundation).

The push for more responsible business practices has fueled a considerable upswing of businesses working in cooperation with NGOs. Companies desiring to be more responsible do not necessarily have the knowledge, training, or dedication to carry out development programs. NGOs, on the other hand, have become instrumental for CSR projects globally, but often they do not have the means and resources to carry out their projects efficiently in a sustainable manner.

For this reason, more and more companies globally seek out NGOs as partners to help them implement solutions and develop relevant CSR projects. However, it seems that especially in China international companies are facing greater challenges to cooperate successfully with NGO, particularly regarding financial related issues and governmental regulations.

In this context, the representatives of different NGOs and social initiatives discussed the general trend of increasing interaction between corporations and NGOs and outlined some of the benefits of the partnerships to both parties, the practical difficulties they present, and the elements necessary to establishing a healthy collaboration between both actors. Attendees had the chance to learn from their examples and meet potential cooperation partners for future projects.

GOOD CORPORATE CITIZENS: WHAT CHINA EXPECTS FROM INTERNATIONAL ENTERPRISES

The panel discussion moderated by Bernhard Bartsch from theBertelsmann Stiftung welcomed the speakers Oliver Yang (Shanghai SoongChing Ling Foundation), Prof. Cao Xuanwei (International Business School),Rosaline May Lee (ShanghaiTech University), and Richard Zhang (Kern-Liebers).International businesses have been pioneers in modernizing China’seconomy. But their role for Chinese society goes far beyond introducingnew technology, creating jobs, and paying taxes. In this context, thepanel discussed how good corporate citizenship benefits both China’sdevelopment and corporate business success. Debated questionsconcerned Chinese customer expectations of Chinese companiescompared to those of international companies. In that respect, themoderator found that Chinese customers tend to place greater trust ininternational companies. Consequently, this companies also face thepressure to meet those high expectations and run an increased risk of a downfall.

Overall the event was well attended and met with acknowledgment and appreciation from all parties, with more than 200 people participating in the Forum and more than 300 people attending the More than a Market Awards. The workshops over the course of a day highlighted several issues related to CSR projects in China, and inspired participants to find ways to overcome discussed challenges. The panel discussions provided an opportunity to gain a better understanding of partnerships with NGOs and the Chinese customer perspective for further social engagement of German companies in China.

In late autumn 2018, German companies with operations in Mainland China will be again able to submit applications for next year´s More than a Market Awards on 30th May 2019. We are looking forward to receiving again inspiring and meaningful projects which can provide ideas, best practices, and CSR strategies for next year’s event.

We hope that the Forum has fostered new networks of the More than a Market initiative. May the ideas developed during the workshops and panel discussions inspire new projects that carry the spirit of our initiative even further.

For more information and to find out how you can get involved, please visit www.morethanamarket.cn or contact morethanamarket(at)sh.china.ahk.de

01 | 2018 | China Branching Out

Foreword and full PDF

In the last few years, worldwide foreign investment of Chinese state-owned enterprises and private firms increased. The investments vary from the manufacturing sector, service sector, luxury industry, to the sports industry, and beyond. The record year of outbound M&A deals by Chinese companies so far was 2016 – with 932 deals worth over USD 220 billion, according to PwC China. Some of those outbound deals have attracted great attention, e.g. the high-profile case of Midea, who acquired the German robotic manufacturer KUKA for EUR 5 billion.

In 2018, China’s government will continue to encourage its enterprises to expand overseas, which was emphasized by Zhong Shan, China’s Minister of Commerce, during the 19th Communist Party Congress in October 2017. There have been numerous initiatives and policies introduced by the Chinese government in recent years to support these strategic investments, such as the “Belt and Road Initiative”, which seeks to enhance trade between Europe, Africa and Asia through infrastructure projects, and “Made in China 2025”, which aims to upgrade China’s domestic manufacturing capabilities and boost innovation. Many Chinese outbound investments will likely be in sectors aligned to those initiatives.

The recent developments in the field of Chinese outbound M&A activities, backed by a supportive political environment, show that the focus for Chinese companies has shifted from capital intense outbound investments to more diverse business perspectives. Foreign companies in the fields of technology, consumer goods, finance, media, and telecommunications are being acquired by Chinese companies to increase their access to foreign expertise, products and services. The “Going Global” strategy for Chinese companies has moved to a new stage, with improved global expansion strategies, and a shift from “Made in China” towards “Made for China”.

This first issue of the German Chamber Ticker in 2018 covers different perspectives including China’s place in relation to the other BRICS nations, internationalization processes of Chinese companies, the convertibility of the RMB as well as political initiatives like “Belt and Road”. Besides this, the issue will point out how German companies ought to prepare in China and Germany to find opportunities within this changing environment.

We hope that you will enjoy this issue of the German Chamber Ticker!

Yours sincerely,

Alexandra Voss

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Cover Story 1 - China’s New Belt and Road Trade Dispute Mechanism

China has announced that it will establish Belt and Road Courts in Beijing, Xi’an, and
Shenzhen under the authority of the Supreme People’s Court of China […] It is unclear which authority China have claimed jurisdiction over BRI disputes. There are existing mechanisms to deal with such matters, ranging from existing bilateral investment treaties to multilateral agreements […]

By CHRIS DEVONSHIRE-ELLIS

The Chinese government has approved a guideline to establish a mechanism to solve trade and investment disputes among Belt and Road Initiative (BRI) nations; the guidelines were passed during a meeting of the Leading Group for Deepening Overall Reform of the 19th Communist Party of China Central Committee.

It was agreed that the principle of wide consultation, joint contribution, and shared benefits should be observed in establishing the mechanism and institution. The basic text states that a dispute settlement mechanism connecting litigation, mediation, and arbitration will be created on the basis of China’s current judiciary, arbitration, and mediation agencies, and by absorbing and integrating legal service resources from home and abroad. Members of the group called for equal protection for both Chinese and foreign parties’ rights to create a stable, fair, and transparent law-based business environment.

China does have an existing trade dispute body, the China International Economic and Trade Arbitration Commission (CIETAC); however, the organization has had problems. All joint ventures in China must contain a trade dispute clause within their articles, which typically refers such matters to CIETAC.

Examining exactly how China proposes to handle trade dispute mechanisms along the Belt and Road while potentially attempting to impose its own arbitration rules on other nations is going to be an interesting legal development to follow. The circumstances of the new arbitration process once it goes into effect and whether it takes precedence over existing trade dispute mechanisms is of vital importance. If so, legal counsel globally will need to look at the implications, regardless of whether their clients even have a presence in China or not.

Dispute resolution at China’s new Belt and Road courts

China has announced that it will establish Belt and Road Courts in Beijing, Xi’an, and Shenzhen under the authority of the Supreme People’s Court of China. The Xi’an court will manage commercial disputes for the Silk Road Economic Belt, which connects China, Central Asia, the Middle East, and Europe. The Shenzhen court will manage commercial cases for the Maritime Silk Road, which connects China,Southeast Asia, Africa, and Europe. Media reports state that Beijing will seek to promote the courts to resolve disputes that emerge in the BRI; observers have noted that the courts appear like the International Commercial Court in Singapore and the International Finance Centre Courts in Dubai.

It is unclear over which authority China has claimed jurisdiction over BRI disputes.There are existing mechanisms to deal with such matters, ranging from existing bilateral investment treaties to multilateral agreements such as those ASEAN has with China, the 2012 “Agreement on Dispute Settlement Mechanism of the Framework Agreement on Comprehensive Economic Cooperation”.

Most bilateral treaties and the ASEAN treaty provide for similar conflict resolution processes: consultation, followed by mediation,followed by arbitration by an ad-hoc arbitration tribunal, with no preset venue or choice of law, either procedural or substantive.

Beijing’s move to establish BRI-specific courts seems to alter that position, and move jurisdiction specifically to China. The Memo randum of Understanding (MoU) China has signed off with over 70 nations concerning cooperation on BRI projects also does not appear to suggest any differing mechanisms for dealing with disputes, other than the usual terminology referring to “friendly consultations”, though these may differ from case to case. The question concerning China’s establishment of the BRI courts therefore revolves around the question of how this mechanism was agreed to between China and the BRI nations with which it has signed agreements.

Understanding China’s Belt and Road MoU

The Belt and Road arbitration courts that resolve trade and related disputes along the Belt and Road routes – in China – has raised eyebrows, as this goes against the generally accepted principal of utilizing an independent, third party as arbitrator. It is unusual for arbitration cases to be heard in a jurisdiction that has laws governing just one of the conflicted parties for obvious reasons of conflict of interest.

To establish how China may be able to pressure other countries to use its courts, the author has examined several of the publicly released MoUs China has signed with foreign governments, principally over the past 18 months to examine what has been agreed to or implied. Some of these, but not all, have been released as a matter of public record onto the public domain, and while there are differences in terms of the trade context in each – different countries have different trading environments with China, and regionally, than others – the basic structure of the agreements tends to have remained the same.

However, examination of the MoUs raise a number of other points about China’s intentions in having structured these, not least the clouding of their legitimacy, and apparent willingness to hang these (officially non-binding agreements) onto other existing legal platforms. These agreements also largely tend to favor China trade and institutions rather than those of the co-signatory, despite these being bilaterally agreed documents.

An interesting point to note is at the end of the document, where both parties agree that the document is not legally binding. However, this means that while the MoU itself may be seen as purely a cosmetic exercise as has been explained to the author by more than one diplomat, the inference swings to the implications and potential manner in which certain elements within the MoU could be interpreted by either party, and especially the Chinese. Such interpretations can, in fact, influence the way in which China views statements made within the MoU, and regard these as important in future diplomatic talks. In short, the purpose of these non-legally binding MoU is to influence, rather than direct – a subtlety that may be lost on some of the signatories.

The MoUs appear largely benign; however, it does contain the seeds of what could, in future, be used as diplomatic tools in terms of insisting that agreements have been reached over certain areas. The tying of the MoU as a non-binding agreement to agreements and institutions that already exist is a manner in which the MoU could later be seen to have implied legitimacy. Where the MoU does tend to veer towards unilateral preference, those preferences appear to benefit China and its institutions and trade, rather than those of the foreign signatory. It remains unsure how these MoUs will be used in future to influence diplomatic talks; however, the fact they refer to legitimate institutions and are signed off at government representative level does mean they could carry rather more future political influence than initially meets the eye – which is almost certainly the precise point.

Managing arbitration along the Belt and Road

There are other existing alternatives to accepting arbitration in China.These include an agreement reached in September last year between the Singapore International Mediation Centre and the China Chamber of International Commerce Mediation Centre (CCOIC), who entered into an MoU to resolve BRI cross-border disputes, while Hong Kong’s justice department has also been developing eBRAM.hk, an online dispute resolution tool for major BRI infrastructure projects.

Given these existing platforms, it could be argued that the Chinese government is trying to force other sides to accept Chinese mediation and arbitration through its proposal to have these three courts rule on all BRI disputes. China’s top legal body has been in the process of “internationalizing” its domestic court system and the three new courts are supposed to be modeled after the established ones in Singapore or Dubai.

Despite these steps by China, the choice of arbitration venue and law, both procedural and substantive, should be left to negotiation between the concerned parties. As a general rule of thumb, third party jurisdictions with established rules and an experienced body of jurists are always preferable to those jurisdictions affiliated with one or the other of the parties to a contract.

It remains to be seen how successful China will be in bringing Belt & Road disputes to courts in China. Meanwhile, legal counsel would be advised to look at exactly what was agreed upon when signing the MoU with China for Belt & Road cooperation. When signing up for Belt and Road participation, foreign governments, in the wake of all the political excitement and potential funding will still need to read the small print.

Further information

Chris Devonshire-Ellis  

Chris Devonshire-Ellis is the founder and chairman of Dezan Shira & Associates.The firm is a pan-Asia foreign direct investment advisory practice and advises both foreign governments and MNC’s on their business strategy, due diligence, and operational issues throughout China, India, ASEAN, Russia and the Belt and Road regions. To contact the firm please email to asia(at)dezshira.com or visit the practice at www.dezshira.com 

Cover Story 2 - China’s Technology Giants Look Outside China for Future Growth

As China's economy enters a more mature phase of growth, its technology all-stars are looking at new markets to drive growth and are specifcally looking closely at China's neighbors in Southeast Asia and India.

By BEN CAVENDER

Over the past two decades, China has evolved from an economy with very low consumer spending power and access to technology (compared to developed economies in Europe and North America), to one in which there are now more than 500 million middle class consumers and more than 660 million smart phones in circulation. In 2017, e-commerce sales in China grew to USD 1.1 trillion a 30% increase, over 2016.The market capitalizations of China’s technology Big 3 have also surged over the last five years and now rival the largest players in the west. For comparative purposes, Alibaba and Tencent both saw their valuations increase to over USD 500 billion in 2018, a feat that means their companies are valued similarly to Facebook and Amazon, or even more, depending on how their stocks perform on a given day. Government policies have largely kept the Chinese internet market closed to investment and acquisition by foreign firms looking to profit from China’s rise, but this does not mean that European companies should ignore China’s technology space.

While targeting China directly may be cost prohibitive or impossible because of regulatory walls, foreign firms need to pay close attention to what Chinese firms are now doing to grow outside of China. This is because many of the most interesting developments in China’s e-commerce space are occurring beyond China’s borders and are part of a larger economic policy strategy that aims to pull China’s neighbors closer to China’s sphere of power over the next 20 years.

As China’s economy enters a more mature phase of growth, its technology allstars are looking at new markets to drive growth and are specifically looking closely at China’s neighbors in Southeast Asia and India. This is because the future consumer potential for these markets is massive. Southeast Asia currently boasts more than 600 million consumers, of which more than 250 million are internet users. While overall average spending power is significantly lower than China, India now boasts a faster growing population of similar size to China making it another valuable target for future growth. Importantly, most of these consumers are young, under the age of 30, and are digital natives who have grown up using mobile phones as their primary means of accessing the internet. Even more exciting, internet penetration in these markets is still extremely low, (under 10% in most cases), leaving massive room for growth.

A Google report has suggested that the nternet economy in Southeast Asia will e worth around USD 200 billion by 2025, nearly seven times growth compared to2015. Meanwhile, e-commerce is expected to grow to USD 88 billion up from USD 5.5 billion in 2015. These are not small numbers. Looking at the projected growth in Southeast Asia, it is easy to see why Chinese technology giants are shifting investment towards setting up beachheads in these markets. Financially, the move makes sense, and in China’s current political climate where offshore investments by Chinese companies are closely scrutinized,these investments also advance an overarching Chinese agenda of more closely integrating neighboring economies with China so are more likely to receive a green light from regulators than would investments in markets or industries of less strategic importance to China.

Over the past two years, Chinese technology companies have invested well over USD 3 billion in companies based in Southeast Asia, primarily in online to offline services, e-commerce, and logistics. The flood of investment started with an initial USD 1 billion investment by Alibaba in Lazada, an e-commerce platform. In the middle of last year Alibaba further increased its stake to 83% via an additional USD 1 billion investment. Lazada has used that cash, and Alibaba’s expertise to increase its range of offerings to include groceries and membership style options to consumers similar to what Amazon Prime offers in the US and some other markets and essentially beating Amazon to the punch, as Amazon considers its own rollout in the region.

Major investments by Chinese companies haven’t stopped there.Some standout examples include a USD 2 billion investment by ridesharing platform Didi Chuxing in Grab, Southeast Asia’s main ridesharing equivalent to Uber. Meanwhile, Tencent has also invested in Go-Jek, Indonesia’s main ridesharing platform as well as Sanook, a Thai media company. Ant Financial has invested in Ascend Money in Thailand, M-Daq in Singapore, Emtek in Indonesia, and Mynt in the Philippines. Alibaba has invested in Tokopedia, an Indonesian e-commerce platform, as well as Compare Asia Group, an online insurance site.

Chinese firms are also investing directly in their own businesses in these markets. For example, Chinese bike sharing startups Mobike and Ofo have both invested heavily in setting up overseas operations in Singapore. Tencent is also rolling out its own music service Joox (similar to Spotify) in Southeast Asia.

These examples represent only a portion of the investment and deal-making happing right now in these emerging markets and the trend is expected to continue through 2018 and in the next few years, as consumer spending power and logistics services in these markets increase. Meanwhile, US and European players have mainly focused on a market entry strategy focused on building up their own local offices in these markets and on localizing current products and services rather than investing to take a stake in local players. This approach is dangerous because it reduces the speed at which foreign players can adapt to market changes.

Watching overseas investment by China’s technology giants is important because it is one part of a broader strategy by China to tie together regional economies and ensure that China has access to markets that can provide a cheap manufacturing base as Chinese companies move up the value chain as well as growing consumer markets for Chinese firms to sell to.  

As part of its globalization push, China is planning on investing more than USD 4 trillion into One Belt, One Road initiatives via the AIIB, and currently has more than 900 projects in progress. OBOR has been criticized because in many cases investments do
not materialize or end up inviting significant political discourse.However, countries in the region are hungry for investment dollars (the projected need for infrastructure investment in Asia is about USD 26 trillion by 2030), and as a result Southeast Asia is far more pro-China than most outside observers would expect. Additionally, countries in the region are looking at how they can continue to grow their own emerging base of middle class consumers. Private investment from Chinese technology players start looking really important when other options for fundraising do not appear.  

The extra experience and capital coming from companies like Alibaba and Tencent is allowing domestic tech players to flourish and is creating an environment that should grow the base of white collar, technology focused jobs in these markets significantly over the next decade. This combination of investment in infrastructure,open trade deals, and tech focused job creation has created a development package that is now extremely attractive to these countries. Looking at the region through an America centric or Europe centric lens the temptation is to say that these countries are wary of Chinese investment and would like more checks and balances in the form of support or cooperation with Europe or the US, but the reality is that they will take the money and jobs where they can get them, and right now that answer is clearly China.  

Forecasting the future is difficult and it is hard to say what economies in Southeast Asia will look like in five years or ten years. What is clear is that to see significant continued growth, developed companies and companies need to be paying close attention to how
developing economies are changing and then have a clearly articulated strategy for working with those economies to accelerate and share in their growth.  

At present, Chinese companies are taking that message to heart and are investing heavily in building the ecosystems necessary  to foster technology growth, create jobs, and grow customers to which they can sell. This in turn is strengthening China’s sphere of influence in Southeast Asia. Meanwhile, European and American companies are failing to make sufficient inroads of their own into these markets and risk being left behind. Spending power in markets like the US or Germany is not likely to grow significantly in real terms over the next decade so future growth is likely to come from overseas investment and the time to be making those investments is now as the risk of not doing so is too great.  

To be successful in Asia over the next decade, European companies will need to look at implementing more aggressive Asia strategies that include stronger partnerships with local firms whether through joint ventures or M&A. Companies will also need to understand that product and service launches often need to happen faster in Asia
than back home. The approach that Chinese technology companies apply to innovation is typically focused on trying out multiple competing ideas, seeing what works and then refining whereas the western technology companies tend to try and perfect services
before bringing them to market. This approach is too slow in Asia because consumer demands evolve rapidly and because your local competitors know that their userbase are more interested in having more options available than in having on a few perfectly executed options.  

Alibaba, Tencent and others are emphasizing investment in Southeast Asia because they feel that they understand the customer better, because entrenched competitors are not that strong, and  because they feel that there is a lot of synergy with their home markets. But they won’t be satisfied with a leadership position in China or in Southeast Asia. Ultimately, they will use Southeast Asia as a testbed for overseas growth following previous early failures in Europe and the US. As they learn they will be thinking very careful about how they can gain stronger access to developed markets in the west. Be ready.  

Further Information

Ben Cavender

Ben Cavender is a Director at the China Market Research Group where for the past 12 years, he has helped advise multinationals on their China strategy.

Cover Story 3 - The Convertibility of the RMB: A Work in Progress

Since the currency rate reforms in 1994, the PBOC started using a single floating exchange rate system that allowed interbank foreign exchange to float at a market rate,but within the PBOC’s published weighted average market price daily. Despite the overall macro-control of the PBOC, the market itself has become more open.

By LEILEI WANG

China and money have had a long history. The country was one of the first to have coins nearly five thousand years ago and paper money just over a thousand years ago. The current iteration of physical money in China is the Chinese Yuan or Renminbi (RMB),meaning ‘the people’s money’, which was launched in 1948 after the People’s Republic of China was established.

A brief history of the RMB

As the Chinese republic started to develop in 1949 and the early 50s, foreign currency reserves mainly came from international trade and remittances from overseas, which were both managed by the government. At that time, the value of RMB was decided by commodity prices which were high and unstable as it was just after the war, which made the RMB exchange rate also unstable.In October 1950, the central government issued the Interim Measurement for the Allocation and Usage of Foreign Currency (《外汇分配、使用暂行办法》 ) as the first move towards exchange rate management. That helped to stabilize the exchange rate somewhat, but not completely. In 1955, the government pushed through monetary reform and took centralized charge of international trade. The RMB appreciated to 2.46 to the USD and stayed at this level for over 15 years. During this period, individuals could only use the RMB for trade and were not allowed to conduct foreign exchange or even hold foreign currency, as the rest was managed by the government.

The shift to a dual-exchange rate

In 1979, the State Administration of Foreign Exchange was established to take a more centralized and independent role in managing the RMB. This was complemented with new regulations issued in 1980 that lead to dual-currency approach to managing the economy and monetary system. The Interim Regulations on Foreign Exchange Control of the People’s Republic of China (《中华人民共和国外汇管理暂行条例1980》 ) gave more authority to companies and individuals in managing their own foreign exchange.

The regulations allowed companies to keep a certain amount of foreign currency, but the exchange rate was set by the market and guided by the PBOC. Meanwhile, the foreign exchange systems were adjusted to better benefit foreign trade and international payments. The government used two settlement price standards: one for the official currency rate, or the previous weighted average rate and the other for foreign trade, based on the average exchange costs of import and export. The policy promoted exports, yet also complicated foreign exchange management e.g. the two ways of calculating exchange rates and the complex reserve channels.

Open policies for a more open market
In 1994, the China Foreign Exchange Center was set up in Shanghai. Similar to before, the exchange rates were market driven and regulated by the PBOC, but the platform was a central foreign exchange system for banks and companies across the country.This was accompanied by a new set of regulations to manage the exchange business which allowed individuals to hold foreign currency, and cancelled limits on frequent international transfers,enabling full convertibility of legitimate foreign exchange.

Since the currency rate reforms in 1994, the PBOC started using a single floating exchange rate system that allowed interbank foreign exchange to float at a market rate, but within the PBOC’s published weighted average market price daily.

Despite the overall macro-control of the PBOC, the market itself has become more open. At the end of 2014, foreign exchange management processes were simplified. For example, the government stopped checking every specific transaction, giving more authority and independence to exchange centers and companies.Those actions facilitated international trade/investment and have further improved RMB convertibility.

When China joined the World Trade Organization (WTO) in 2001,it opened a new chapter. China’s balance of trade created foreign exchange reserves that at one point reached USD 3.99 trillion. On the 11th August 2015, the government adjusted the foreign currency regime based on the US dollar to incorporate a ‘basket’ of currencies.

Although the policy tried to make currency rates more dependent on markets, this caused concerns for the Chinese economy,further devaluing the RMB and currencies from many emerging markets e.g. Malaysia and Russia. The government took action to control the devaluation as foreign exchange reserves dropped down to USD 2.99 billion at the end of January 2017, which was followed by a RMB that largely stabilized in 2017.

Prudent policies with the long-term goal of a free floating RMB
For companies in China, after years of adjustment in the foreign exchange and settlement process, they currently face several challenges:

1. Strict verification for settlement
To avoid money laundering and illegal capital flight, China has imposed stricter scrutiny on certain overseas deals and has pushed banks to ensure domestic customers are pre-approved before transferring USD 5 million or more, in both dollars or RMB, out of the country. The regulation also covers RMB that is sitting in overseas accounts, which was previously left un-scrutinized by regulators.

2. Higher requirement on foreign banks
Foreign banks in China do not have as much income from domestic activity as their Chinese counterparts and often rely on overseas business to compensate, so the cross-border regulations tend to affect them more especially as they rely more and more on the cross-border business.

It is not all bad news though because as the Chinese government continues to push for the RMB to be a key settlement currency globally, in the process they are making it easier for foreign companies to trade both in and outside China, especially small and medium sized companies which often prefer to settle in RMB. The increasing openness of the RMB facilitates this convertibility and reduces foreign exchange risk.

3. A freely floating RMB is the final goal, but still needs time
According to the ‘Impossible Trinity Theory’, a government can only control two aspects of three fundamental economic practices: a controlled foreign exchange rate, an independent monetary policy and the absence of capital controls. For years, the Chinese government chose the first two and will certainly not give up capital controls in the near-term, so it is expected that currency controls will remain stable in general with little fluctuation as it continues to increase its international RMB footprint.

However, full internationalization of the RMB is a long process.The government has been moving in that direction and has a few achievements highlighting the progress. On the 30th November 2015, the International Monetary Fund (IMF) voted the RMB to be one of the several main world currencies (US Dollar, Euro, British Pound and Japanese Yen), including the RMB into the Special Drawing Rights (SDR). In addition, the European Central Bank started replacing their dollar reserves with RMB. The German Central Bank claims that they will also include RMB in their reserves.

To further expand the RMB’s influence, the Chinese government will also need to set up more clearing houses internationally, allowing more foreign financial institutions to trade RMB. In 2016,the Bank of China New York branch was designated to be the first American RMB clearing center, bringing the number of RMB offshore clearing centers to 21. Along with the establishment of overseas settlement centers, the foreign exchange rate will eventually be fully market driven and out of the government’s control.To reach the final goal, the PBOC will broaden foreign exchange rates and interest rate controls step by step. During the process the government also will consider industrial development and employment status. RMB will finally be free floating, but certainly at
its own speed, though the process will take time.

Further Information

Leilei Wang

Leilei Wang graduated from the University of Southampton with a Masters degree in Accounting and Finance. She is a consultant at Kapronasia, focusing on banking, payment, and cryptocurrency research. Leilei is also the Shanghai ambassador of Women in Blockchain Asia. Kapronasia is a leading provider of research and consulting focused on Asia’s financial industry including banking,payments, capital markets, and crypto-currency.

Cover Story 4 - China’s Outbound: Investment or Internationalization?

This aspect of globalization, whether capital intense or organic growth oriented, facilitated Chinese companies to be more in touch with the foreign world, increasing their desire of having access to foreign expertise as well as products and services.

By JOSE MANUEL MATEU DE ROS

Since 2009, China’s outbound investment has been focused on large foreign investments led by big Chinese companies, both public and private. Most of the investments abroad were capital intense with diversification of their portfolios being the solely main purpose be hind it. There was no specific industry focus either, but investing in industries that would benefit China’s future development; to name a few industries: raw materials, food, infrastructure, chemicals, entertainment, tourism etc.

Up to October 2017, as per the Ministry of Commerce’s figures above, one can see that non- financial outbound investment year to date was USD 86 billion. This sharp decrease from the end of 2016,where total investments went from USD 170 billion to USD 120 billion by end of 2017, was due to many factors - main driver being the stricter capital controls implemented nationwide by regulators. The unexpected foreign acquisitions by Chinese companies in 2016 led to a considerable reduction of China’s foreign exchange reserves. This, consequently, led the depreciation of the yuan. For that reason, the 2017 foreign acquisitions were more scrutinized, encouraging those Chinese mergers and acquisitions with actual real business needs, as this would help in increasing the country’s exposure abroad as well as the internationalization of the yuan.

This trend has been tightened even further as now all transactions should be approved by the Chinese regulators when the amount exceeds USD 300 million. The reasons for this are not just to control investment flows, but also to rationalize these investments so that they are value adding to the investing company, acquired one and shareholders of both.

Therefore, the shift from a capital intense outbound investment to a more business-oriented focus that could benefit the domestic industry and consumption upgrade in China has been clearly paved as the future trend.This aspect of globalization, whether capital intense or organic growth oriented, facilitated Chinese companies to be more in touch with the foreign world, increasing their desire of having access to foreign expertise as well as products and services. This, in turn, has led the economy from a manufacturing focused one to a service focused one, shifted from a “Made in China” towards a “Made for China” sentiment, which helped increase the appetite of the local
population towards foreign consumption, fomenting cross border commerce even more. Soaring demand for foreign goods triggered foreign companies to be interested in selling to the Chinese market, and what’s more – through their popular online channel.

Regulation also helped to meet this demand and one of the channels that has considerably grown to allow this is the cross-border e-commerce. With two main players in the market, Alibaba and JD.com, and many others at a smaller scale (Vip.com, Amazon.cn,etc.), not only are main tier 1 cities increasing their products offering by including many foreign brand names on their catalogues but also increasing commercial reach and capillarity by supplying these to tier 2 and 3 cities, including remote rural areas. This boost of cross border demand and supply, together with the integration of different payment methods and improvements on the supply chain side of delivery, has led the country to have to innovate and evolve at such a fast pace, that their technological advances are not only unstoppable but admirable as well as encouraging for others to keep up - if they do not want to be left out of the race.

As the natural next step of the cycle, on the other hand, Chinese companies also wanted to expose themselves worldwide. Exposing foreign brands to Chinese technological advances and fast evolution in all types of industries has allowed them to explore at first-hand what these are, and some have even gone a step beyond, integrating them within their organization.

This phenomenon has facilitated and even accelerated the process of the internationalization of Chinese names and brands worldwide, and the example of it can be the considerable number of acquisitions in Technology, Entertainment and Tourism, three sectors with highest growth in the last decade. To name a few, Ctrip acquired Skyscanner for USD 1.7 billion in late 2016, local ride handling companies have not only acquired UBER in China in 2016, but are also expanding themselves across the globe, agreeing to buy Brazil’s main rival of UBER early this year. Other famous foreign brands that now have a Chinese owner are football clubs such AC Milan, entertainment companies such Cirque du Soleil, sports companies as Triathlon or hotel chains such Club Mediterranee. But, we may ask ourselves, how many businesses have actually managed to internationalize this way?

Three years ago, bike sharing companies such as OFO or Mobike did not exist, the ecommerce ecosystem or platform integration were being developed to meet consumers’ demands in facilitating day to day life.Yet, once tried and tested locally, why not exploit it internationally? Partnering with Chinese companies assists many entities in their digital transformation. However, on the other hand, we can see that while some of the Chinese companies are setting up teams overseas,still decisions are taken on a centralized basis in China; this lack of speed, regulation, costs, customer base and market share is hard to understand and get around, these are also hurdles on the way. Thus,the ideal internationalization is a hybrid: finding a partner abroad and conduct strategic partnerships with.

Let’s take the example of payments platforms as a good way to understand the importance of partnerships in the Chinese internationalization strategy. Millions are the Chinese that are starting to travel abroad, and millions are the ones yet to come as the country’s wealth keeps growing. By understanding Chinese consumption behaviors, one of the main objectives when travelling abroad is shopping, and for that reason many are the technological companies that want to increase their capabilities to facilitate these payments for the local Chinese in their trips abroad. As an example, three of the main payments companies in China (Union Pay, Alipay and WeChat Pay) are closely working with banks to implement in its subsidiaries of Spain, UK, Portugal, Germany and Poland the incorporation of their payment models (via QR code) within the bank’s point of sales. Only by partnering with a local Bank, these Chinese payment companies have the capability to reach millions of merchants, which in turn helps them build their brand too.\

We will also see other effect in the internalization of Chinese companies. The Chinese government understood several years ago that  Chinese brands were not really recognized by foreign consumersas reliable in terms of quality. ‘China 2025’ governmental program is trying to enhance the ‘Made in China’ brand from ‘cheap’ and ‘low quality’ to ‘innovative’ and ‘quality affordable’. This trend has already started; many Chinese brands are getting to be in the top of European and American consumers’ minds and today Huawei,Xiaomi or Oppo in the mobile industry are starting to compete as equals with Samsung or Apple. Even in other industries, Chinese brands are completely leading the world in terms of innovation; the example is DJI in the new but fast-growing drone business. Some others will be taking important steps in the next years to come in the automotive industry both in self driving cars and electric cars, entertainment, artificial intelligence, virtual reality and business intelligence etc. Many are yet the changes to be seen ahead.

Further Information

Jose Manuel Mateu de Ros

Jose Manuel Mateu de Ros is Head of Strategic Partnerships and main responsible for Retail and Commercial Banking activities at Santander Asia Pacific. He joined Grupo Santander in 2005 and has been working in different areas and geographies. Prior to this role, since 2014 when Grupo Santander acquired 8% of Bank of Shanghai, he was Head of Retail and Commercial Banking for Santander Asia Pacific. He can be reached at internationaldeskchina(at)gruposantander.com  

Cover Story 5 - The Big C in the BRICS

Has the BRICS lived up to the expectations from its conception?

By ALBERT KHAOUTIEV

The acronym BRIC was first mentioned in 2001 in a report by an economist of Goldman Sachs. South Africa joined the club only in 2010 with the help of China including the African continent as an additional player in the emerging markets.The acronym BRICS, which aims to represent the rise of emerging markets around the world, is synonym with the rise of the non-western world. Indeed, Brazil, Russia, India, China and South Africa are often seen as a counterweight to the G7; the man behind the acronym even predicted that the BRICS would surpass the G7 by 2035.The bloc has started to organize itself with its first formal BRIC summit in 2008 held in Russia and since then many international forums and official gatherings by the member countries willing to advance their agenda on the global scale have followed.Western countries have been developing fast in the 20th century and grew to become the leading economies. However, nowadays the BRICS countries should not be underestimated. They account for 43% of the global population, 26% of the world's land coverage and hold a GDP of USD 18.5 trillion. According to IMF, they contributed 23.6% to the world economy in 2017.

 

What is the current status of the BRIS and their relationship with China?

Brazil
Brazil has had many internal scandals including corruption charges in the last years that led to the impeachment of the president Dilma Rousseff. However, despite the political turbulence Brazil’s economy seems to be back with growth again after a recession in 2016. According to the latest report from the IMF in January 2018, the country is forecasted to expand by 1.9% in 2018.

Within BRICS, China is Brazil’s major trading partner and is seen as the big brother in the development of Brazil and Latin America in general where China wants to build itself as a trusted partner. With Russia, bilateral trade hit USD 4.3 billion in 2016 according to Brazilian government sources. With South Africa, trade has been going down from 2011 to 2016, but the launch of the free trade agreement between Mercosur and SACU (Southern African Customs Union) is aimed to boost trade between the countries. India, on the other hand has had little cooperation with Brazil as they are focusing their trade on the faster growing Mexico.

The economic outlook seems to be rather positive for Brazil. However, it may soon be caught back by its demons in the political arena. The country will hold general elections this October where the former president Luiz Inacio Lula da Silva is planning to run.

Russia
After disputes with the West, Russia turned its focus to the East, getting closer to China and finding new partners such as Turkey and Iran.The economy has been in a precarious situation, but the country is continuing to grow, and the IMF predicts the Russian economy to grow by 1.7% in 2018.

Being the largest country in the world with massive resources of oil, coal and natural gas, Russia has been pushing to promote economic cooperation within the BRICS and bolster the alliance. For example, it is now in discussions to establish its own gold trading system as BRICS members are all either major consumers or producers of physical gold.Moreover, the Central Bank of Russia (CBR) opened its first foreign representative office last year in Beijing for a greater cooperation between Russia and China. Finally, the CBR also started talks with BRICS nations to create a payment system that would be an alternative to the SWIFT system.

India
When it comes to India and China, geopolitics plays a crucial role and affects their economic and political decisions. Both countries are the main drivers of the BRICS, but also increasingly consider each other as regional competitors. Because of this constant competition, China is the only BRICS member that has not officially endorsed India to secure a membership at the UN Security Council.

However, both countries are also closely connected. On the one side, China is India’s largest trading partner, even though the trade is skewed in favor of China. In 2016, India’s trade deficit with China reached about USD 46 billion. On the other side, China strongly relies on India’s cooperation to push forward its Belt and Road Initiative.

South Africa
South Africa is seen as the Eldorado of natural resources. As a matter of fact, the country own vast quantities of gold, diamonds, platinum,iron ore, copper, manganese, uranium, chromium, silver, titanium and beryllium. The country is also the largest producer and consumer of energy on the African continent.

Since joining BRICS, South Africa has benefited from both trade and diplomatic ties with the other member countries. Without surprise,China is its largest trading partner and top investor particularly in infrastructure, energy, transport and banking. For example, ICBC owns a 20% stake in South Africa’s Standard Bank.

However, South Africa’s place in the BRICS could be debated. Its economy has been growing slowly at 0.9% in 2017 and the IMF expects the GDP to remain steady this year. Just recently, the president has been pushed by his own party to resign due to corruption scandals, weakening the position of South Africa within the BRICS.

What is next for the BRICS?

Has the BRICS lived up to the expectations from its conception?
There were big plans, but relatively little results. The bloc has however
managed to transform itself from a mere political association into an
increasingly relevant influencer on regional and global affairs. In 2014,
it set up the New Development Bank, to be an alternative to the IMF
and the World Bank, with headquarters in Shanghai. It started to issue loans last year, however its capital is still much lower than the one of the AIIB. They have also been planning to create a joint rating agency to counterweight the three globally accepted credit rating agencies S&P, Fitch and Moody’s.

The main challenge for the BRICS is their geographical and cultural differences. They have little in common aside from the fact that in 2001 they were willing to embrace globalization and were forecasted to drive high future growth. Over the years, it is clear that China has come to play a pivotal role in the development of the association. Trade between China and the other four-member countries of the BRICS accounted for 85% of total intra-BRICS trade; at the same time these countries face strong competition from the cheaper manufactured Chinese goods - leading in the past Brazil and India to address the issue at the WTO. Meanwhile, China’s economy has grown to be larger than the ones of all other members combined.

President Xi made himself a defender of globalization at Davos summit last year. And the EU and the US have been calling on China for the past years to open more its markets, however, the country’s reforms and policies have not yet shown the results hoped for. There are still many concerns for foreign companies operating in China, such as forced technology transfers and tight internet control.

The German ambassador to China, Michael Clauss, said that it was in everybody’s interest to support an open global trade system centered on a strong WTO. “Chinese investments are highly welcomed by Germany, however, it cannot continue to be a one-way street: openness on the one side and tightening market access on the other”. Indeed, European companies have not seen the same welcome in China even though the EU is China’s biggest trading partner. There is need for greater reciprocity - trade happens when both parties are willing to collaborate.

Hence, there are not many things that unite the BRICS making it difficult for them to have a common agenda and the BRICS’ future remains uncertain. Perhaps it is time to forget the BRICS? Even the inventor of the acronym has turned his attention to the new economies called « MINT »: Mexico, Indonesia, Nigeria, and Turkey - the next key emerging countries. However, the BRICS’ consumption markets have powerful potential. So, the question could be how the interplay of the key players in the alliance needs to shift. If better cooperation is institutionalized, the BRICS might come to be the relevant economic alliance in the future.

Further Information

Albert Khaoutiev

Albert Khaoutiev is a senior consultant at Morgan Philips, a French executive search firm where he looks after the finance desk. Prior to the recruitment industry, Albert worked in investment management. He has been living in China over three years and usually comments on China-related topics including economy and politics.He holds a Masters degree in international business from HULT International Business School.

China Industry - The Chemical Industry

By DR. KAI PFLUG

According to CEFIC, in 2016 China accounted for 39.6% of global chemical sales, or EUR 1331 billion. This compares to 15.1% of global sales for the EU area and 15.7% of global sales for the NAFTA area – or in other words, China´s share of global chemical sales is far bigger than the NAFTA and EU area combined. From a specifically German perspective, with a global chemical market share of 4.3%, Germany represents the third biggest global chemical market – but its size is not much more than one tenth of the Chinese market.

China´s chemical industry has indeed grown very rapidly in the past two decades. For example, in the period from 2006 to 2016, the growth figure was an average annual 12.4% while there was no growth in chemical production during this period in the EU area (0%) and even a slight average annual decline in the US (-0.9%). While growth has certainly slowed down somewhat in the past few years, the sales growth of most multi
national chemical companies in China in 2017 will still be substantial. CEFIC forecasts that by 2030, China´s chemical market will have a share of 44%, which  implies a relatively modest annual growth rate of 4.6% - yet still a much higher value than the 2.5% annual growth predicted for the EU area during the same period.

Multinational companies nowadays are certainly aware of the importance of China, particularly as a source for future growth. However, most such companies currently achieve only about 10-15% of their global sales in China – not a small amount but far from the 40% of sales that are China´s share of the global market (and that thus would be a target value for a truly global chemical player). And even though the sales of multinationals show strong annual growth, this growth is generally below the overall market growth in China. In other words: The market share of multinational chemical companies in China is shrinking.

This may partly be because China´s chemicals market displays some characteristics which are quite different from the western markets chemical multinationals typically operate in. What are these key characteristics of the Chinese chemical industry?  

Stronger government influence

While the Chinese government occasionally issues statements assigning an increasing role to markets, the Chinese economy is much more under government control than in the West. For the chemical industry, this has two major consequences. One is the strong presence of state-owned enterprises such as Sinopec and PetroChina, particularly in the petrochemical segment. The other is the much greater amount of government planning, most visible in the detailed Five Year-Plans for the chemical industry, which describe aspects such promoted chemical segments as well as the overall industry structure.

Higher degree of industry fragmentation

China has approximately 30,000 larger chemical companies with annual sales of about EUR 2 million or above. To give one example, there are more than 2000 coatings companies in China, and the top 200 only account for about 60% of total production volume.

Prevalence of overcapacity

For many basic organic chemicals, China has massive overcapacities. For example,adipic acid capacity rose by an annual 19% in China between 2010 and 2016 while demand only rose by an annual 14%, resulting in current operating rates below 60%. And typically for China, even in this environment there are plans to expand the existing capacity by more than 30%.

Competition among ownership types

While the question of ownership has only a limited influence on the activities of western chemical companies, this is different in China. Foreign-owned chemical companies tend to be technology leaders specializing in high-end materials and specialties,state-owned entities focus mostly on bulk production of basic chemicals, while private companies are continuously expanding their activities and upgrading their technology. In the past decade, the ownership type has strongly correlated with market success,with private companies showing the highest growth and state-owned entities the lowest.

While these characteristics have been observable for a few years, there also have been some relatively recent trends strongly affecting the chemical industry:

Shift from imports to exports

In the past, China was often the default export destination for a large range of chemicals. However, as chemical companies in China build up capacity and expand their portfolios, China is increasingly becoming an exporter of chemicals. In trade with the EU region, China is already a net exporter for chemicals, but still a net importer for somewhat higher-value materials such as polymers, consumer chemicals and specialty chemicals.

Growing importance of higher end materials

As the overall economy in China matures,the demand for high-end materials such as specialty chemicals and engineering plastics increases. While foreign companies traditionally have a strong position in these areas, increasingly private Chinese companies also become important players.

Increasing salaries

Average worker salaries in China have increased dramatically in the past decade or so and are now easily higher than in many Southeast Asian countries. To some extent,the effect of this trend on the chemical industry is lower than on more labor-intensive industries such as textiles. However, there is an indirect effect, e.g., demand for textile chemicals and textile dyes now growing more strongly in countries with low labor costs (such as Bangladesh and Vietnam) than in China itself. Even a few Chinese textile producers have shut down plants in China and opened new sites in these countries with substantially lower labor cost. In the long run, this could mean that chemical production for selected segments will also move away from China.

Localization

With the growing importance of China as a market, multinational chemical companies have realized that this market eventually mostly needs to be served via local production. This localization process is ongoing and includes more and more functions, including those (such as research) initially still mainly kept abroad.

Tightening environmental regulation

This is very likely the most important trend in China´s chemical industry in the past two years or so. President Xi Jinping has made environmental protection one of his top three priorities, and in contrast to previous such statements, this time there is a strong focus on implementation. This development not likely to be reversed, even though some Chinese experts estimate that the campaign has decreased GDP growth in 2017 by 0.2%.It is therefore worthwhile for companies with chemical production in China – and for those doing business with them – to examine their direct and indirect consequences.

• First of all, the environmental inspections have led and will lead to short term production stops. In the past,about 40% of all companies inspected were affected by such stops, which typically lasted two to four weeks.Generally, the polluting companies have to choose between upgrading their equipment to meet the environmental requirements and stopping production altogether. Even companies not affected by these stops directly may be affected indirectly through their supply chain.

• Second, much longer production stops may result as a consequence of chemical companies being forced to relocate.Broadly speaking, the government wants to relocate all production of toxic chemicals into dedicated industrial parks. The timeframe depends on plant size. Small and mid-sized chemical plants (with up to about 1,000 employees and up to about EUR 50 million of annual sales) need to start relocation in 2018 and have the relocation completed by 2020.

• Third, it will take much longer to get permissions for new plants. A big and well connected local chemical company told the author that instead of the previous six months, the local authorities would now take about 18 months to give such a permission, primarily as the environmental due diligence will become more important in the approval process. As a consequence, markets for individual chemicals will take more time to adapt to demand increases.

• Fourth, production costs will increase.Some examples of such cost increases include higher costs for water treatment, higher costs for raw materials,the imposition of the newly introduced environmental tax, and higher transportation costs due to tightened regulation.In the longer term, the aspects listed above will also have an impact on the overall structure of the chemical industry – an effect that is quite appreciated by the government and the bigger players. Many specialty chemicals segments in China are very fragmented and suffer from overcapacity. The tightened environmental regulation will lead to industry consolidation as the weakest and smallest players will not be able to afford the necessary production upgrades. This will also lead to a reduction in overall capacity along with the improvement in technological level.Generally, the tightened environmentalregulation will help bigger and technologically more advanced players. Indeed, these companies may benefit from higher prices as excess capacity is eliminated. This is good news for foreign players in China as they tend to have both a bigger, average size and better technology, particularly regarding emission control. In addition, the stricter implementation of regulation for all types of companies – whether foreign owned or local – corrects the previous trend of tighter control of foreign-owned ventures.How should western companies react? For companies producing in China, the key question is whether they are already located inside a chemical park or not. In the latter case, there will be intense pressure to relocate quickly. And of course, even inside a chemical park, they will need to strictly adhere to mandated emission control, though for most foreign companies,this is a given already.

A second focus should be on securing the supply chain. In particular, the reliance on small players with limited resources may not be advisable, as these companies are the most likely to be forced into production stops. Instead, western companies sourcing from China should continuously evaluate their domestic suppliers and focus on those which have sound environmental policies in place.

In the last two years it has become evident that the Chinese government is serious about environmental protection.If western chemical companies deal with this new situation proactively, they may benefit because it represents a shift towards a more equal playing field between foreign and domestic chemical producers in China.

Further Information

Dr. Kai Pflug

Dr. Kai Pflug is the owner of Management Consulting – Chemicals (www.mc-chemicals.com), a consulting company focusing on the chemical industry in China. His clients have included most multinational and many domestic chemical companies in almost all segments of the industry. He has been based in Shanghai for the last 15 years, and published almost 200 papers on various aspects of the chemical industry.He also runs a LinkedIn group covering the chemical industry in China. He can be reached at kai.pflug(at)gmail.com  

Feature 1 - Legal Update

By DR. CHRISTOPH SCHROEDER

Introduction

The 15 years from 2002 to 2016 have seen a rapid and continuous growth of outbound investments by Chinese companies, starting with a total value of less than USD 3 billion and reaching USD 170 billion at the end. In 2014, that figure even surpassed for the first time the total value of inbound investments, which had been the predominant direction of investments for decades before. Another obvious sign of the increasing significance of outbound investments were the growing number of large transactions. In 2016, Chinese buyers even inked three deals in Germany with a value of EUR 1billion or more, which had been very rare until then: Midea Group Co., Ltd.’s takeover of the majority of KUKA AG’s shares, Beijing Enterprises Holdings Limited’s investment in EEW Energy from Waste GmbH and China National Chemical Corporation’s acquisition of KraussMaffei Technologies GmbH.

In 2017, however, for the first time at least since 2002, the total value of Chinese outbound investments decreased. Likewise, the number and value of outbound M&A transactions slumped sharply. Both developments, the steady growth until 2016 and its sudden interruption in 2017, were largely influenced by the Chinese government, namely by the ‘go global’ strategy that encourages Chinese enterprises to make overseas investments on the one hand and by the restrictions to the outflow of foreign exchange on the other hand.

Against this background, it is worthwhile taking a look at the new rules on outbound investment set by the National Development and Reform Commission (NDRC), one of China’s key regulators of out bound investment: The Measures for the Administration of Overseas Investment by Enterprises (New Measures) were issued on 26 December 2017 and became effective on 1 March 2018. The New Measures have replaced the Measures for the Administration of Approval and Filing of Outbound Investment Projects (Previous Measures), which had been issued by the NDRC in 2014.

The New Measures determine, among others, under which circumstances, for which kind of projects and at what time a Chinese enterprise planning an outbound investment needs to involve the NDRC or its respective local counterpart. Hence, it is obviously the Chinese investor who must make itself familiar with these rules.However, also the foreign company that intends to sell its business to the Chinese investor, e.g. a German owner of a family business, should be aware of the New Measures: It is essential for the security of the deal to know when the NDRC process should be started and how the process should be reflected in the transaction documents. In this connection, dealmakers must bear in mind that the NDRC is not the only Chinese authority controlling outbound investments.Rather, several other domestic regulators may need to be involved, which should be checked at an early stage of the investment. For example, the project must be filed with, or obtain approval from, the Ministry of Commerce (MOFCOM) if it comes under the scope of the MOFCOM regime. At the payment stage, a registration with the State Administration of Foreign Exchange (SAFE) must be done by the bank that has been instructed to handle the transfer of the foreign exchange funds. If the investor is a state-owned enterprise, it needs to obtain an approval by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). Listed companies may require an approval by the China Securities Regulatory Commission (CSRC). The investor might need to comply with additional rules, especially industry-specific rules.

Highlights of the New Measures

In the following, highlights of the New Measures will be addressed:

a) Expansion of the scope of investment projects

The New Measures expand the scope of the investment projects which the NDRC needs to review.

This particularly applies to indirect investments: Whereas investments made directly by an enterprise incorporated in China are captured by both the previous and the new law, there will be a change regarding situations in which the investment is made by an offshore enterprise. Under the Previous Measures, the NDRC only had to be involved in indirect investment situations if the domestic entity carried out the outbound investment through its offshore entity by way of providing funds or a guarantee or other means. This is no longer the relevant test. Rather, the NDRC seeks to close loopholes by determining that the New Measures apply to any investment by an offshore enterprise controlled by a domestic entity. “Control” is defined as directly or indirectly holding more than half of the voting rights of an enterprise or the capability of directing important matters such as operation, finance, personnel, or technology of the enterprise. Checking whether a company holds more than half of the voting rights is rather straightforward. But the capability of directing important matters of an enterprise might prove to be more difficult. It is easy to imagine that this criterion will cause some debate between the NDRC and lawyers of discussions. Whereas one side might argue that the law governing the relevant offshore entity should apply, the other side may prefer checking whether the domestic enterprise is in fact capable of directing important matters.

The New Measures clarify that they apply to outbound investments by both non-financial and financial enterprises. Under the Previous Measures, it was questionable whether outbound investments of financial institutions were to be controlled by the NDRC.

As usual in Chinese law, also the New Measures essentially consider Hong Kong, Macao and Taiwan as “offshore”, which means that, for example, investments in Hong Kong by a domestic company or offshore investments through an enterprise in Hong Kong controlled by the domestic company are subject to NDRC scrutiny.

b) Expansion of the scope of sensitive projects

Like the previous regime, the new law provides that sensitive projects require an approval by the NDRC – rather than a filing – and that a project is sensitive if it involves either a sensitive country/region or a sensitive industry. However, the New Measures contain more detailed definitions of these terms and also give the NDRC more discretion in determining whether a project must be regarded as sensitive:

The term “sensitive countries/regions” is now defined as country/region (1) without diplomatic relations with China; (2) in war or civil disturbance; (3) in which enterprises are restricted from investment under any international treaty or agreement, among others, concluded or acceded to by China; or (4) any other sensitive country/region.

The following are sensitive industries according to the New Measures: (1) research, production or maintenance of arms; (2) exploitation or utilization of cross-border water resources; (3) news media; or (4) an industry in which outbound investment needs to be restricted according to China’s laws, regulations and control policies.

The New Measures stipulate that the NDRC shall publish a catalogue of sensitive industries. On 11 February 2018, the NDRC released the Catalogue of Sensitive Industries for Outbound Investments (2018 Edition) (Catalogue). Like the New Measures, it became effective on 1 March 2018. The Catalogue repeats the industries which the New Measures have already determined as sensitive – see items no.(1) to (3) above. Besides, it lists the following industries: real estate, hotels, cinemas, entertainment, sports clubs and the overseas establishment of equity investment funds or investment platforms without a specific business project. This list, as the Catalogue explicitly states, is taken from the Notice on Further Guiding and Regulating the Directions of Outbound Investment issued jointly by NDRC, MOFCOM, the People’s Bank of China (PBOC) and the Ministry of Foreign Affairs (MFA) on 4 August 2017. The name of the Catalogue, which contains the addition “(2018 Edition)”, suggests that the NDRC plans to update it from time to time. Whether there will be a new edition every year or less (or more) frequently, remains unclear as the Catalogue itself and the notice by which it was promulgated are silent on the expiry of the Catalogue.

The Catalogue, together with the catch-all provisions in items no. (4) of the New Measures relating to sensitive countries/regions and to sensitive industries, respectively (see above), will grant the Chinese government and in particular the NDRC increased flexibility in controlling outbound investments without amending the New Measures.

c) Streamlining the procedure

A number of changes brought about by the New Measures relate to the procedure the Chinese investor must go through. Major issues in this respect are (1) the action that is required to be taken by the investor – in particular: obtaining approval or completion of filing, (2) the competent authority – NDRC or its local counterpart and (3) the processing time. These issues depend on the type of the entity thatintends to make the investment, whether or not the project is sensitive and whether the investment amount is below USD 300 million. The details will not be described here in more depth.

Rather, it is worth noting that the New Measures have abolished the “small road-pass” regime. This refers to a requirement of the Previous Measures: Where an investment amounting to USD 300 million or more was to be carried out by way of an acquisition or a competitive bidding, the Chinese investor had to submit a project information report to the NDRC before making binding declarations. Commonly, the purpose of this formality was described as to prevent Chinese bidders from competing against each other. Others say it had been introduced to choose the Chinese bidder that is best placed to carry out the transaction. However, reportedly, there have been cases where multiple Chinese bidders were granted “small road-passes” for the same project. In any event, the uncertainty and the government interference connected with the requirement of the project information report has proven to be a disadvantage for Chinese bidders. And that is likely to be the reason for the NDRC to have waived the “small road-pass”.

The New Measures have a simpler answer to the question by what time the investor must have completed the NDRC procedure, i.e. when the investor must have obtained the approval or the filing notice. The rules explicitly state that this must be done before implementing the project, which means before contributing assets or interests or providing finance or security. Under the Previous Measures, the investor needed to complete the procedure before signing legally binding documents or make the completion of the procedure a condition for the “effectiveness” of the signed documents. There used to be some uncertainty as to whether such a condition referred to the effectiveness of the contract (as the literal interpretation suggests) or was rather meant to be a closing condition. To see it as a closing condition seemed to be the most common approach under the Previous Measures, and that will be the standard of practice now.

Conclusion

The New Measures simplify the process a Chinese investor must go through and clarify several of the previous uncertainties. This will certainly help Chinese companies, especially when they need to follow a rather tight schedule, for example in a bidding process for the sale of the overseas target company.

But the NDRC will also gain more control over outbound investments, namely because more types of indirect investments come under the scope of the New Measures and there is a wider variety of sensitive projects. Like under the previous rules, parties of outbound investments are well advised to check the New Measures at an early stage of the transaction, to adequately reflect them in the transaction documents and to bear them in mind as the transaction proceeds.

Further Information

Dr. Christoph Schroeder is Partner at CMS, China. He specializes in advising Chinese companies regarding outbound investments. Ranked as a Top 10 Global Law Firm, CMS can provide a full range of legal and tax service in 42 countries with 74 offices. Together with 4,500 CMS lawyers worldwide, CMS China (Shanghai, Beijing and Hong Kong) offers business-focused advice tailored to your needs.
For more information, please visit - https://cms.law/en/CHN/

Feature 2 - China Economic Outlook 2017/2018

China’s economy grew stronger in 2017 with a GDP growth rate of 6.9%, accelerating for the first time in seven years. The strong growth figures were driven by traditional growth drivers such as government spending on construction and infrastructure projects as well as increased exports due to a recovering global economy. However, amid efforts to rein in the rising debt burden, cool down the property market and clamp down on pollution, many experts expect a slight cooling of the economy in 2018. 

 

By JOSIPA MARKOVIC

A look back: Overall strong growth in 2017

Despite widespread forecasts of an eventual slowdown, China’s economy grew strong in 2017. China’s GDP growth rate 2017 reached 6.9%, 0.2 percentage points (p.p.) above last year’s growth rate and well above the defined annual growth target of 6.5%.However, particularly in the first nine months, the speedy growth was driven by traditional growth drivers: While a recovering global economy has helped China’s exporters, a main reason for the strong growth numbers was increased industrial activity. Coal miners and metal makers increased production as commodity prices rose—a result of government-mandated capacity cuts that led to closures of many private companies. Furthermore, still-solid demand from real-estate developers has lifted profits in the manufacturing sector. According to the Wall Street Journal, China’s increased output was largely driven by state-owned companies, whose profits surged by 15.2% last year.

Slight downturn in Q4 2017 amid financial deleveraging, but momentum remains solid

Once China’s twice-a-decade Communist Party congress was successfully completed on 24 October, the world’s second largest economy started to show some signs of moderation – a sign that Beijing is turning away from quantitative growth targets, and instead taking stronger action to rein in excess borrowing and focusing on efficiency. Major economic indicators slowed down in the fourth quarter of 2017. Fixed Asset Investment grew 7.2% from a year earlier – representing the slowest pace since 1999, according to Reuters. December’s Industrial Output outperformed the 

growth rate of the preceding month by 0.1 p.p., however the figures show a declining trend since the fourth quarter 2017. Moreover, after a surge of foreign trade figures throughout last year, China’s exports and imports cooled down in December 2017, with exports growing at 10.9%, 1.4 p.p. down from the previous month, and imports growing at only 4.5%, a slowdown of 13.2 p.p. compared to the November boom.

Outlook: China’s leadership to focus on the long term

With its ongoing persistent growth, China is likely to achieve its target of doubling GDP and per capita income by 2020 from 2010  – a target set six years ago by former China President Hu Jintao. At last year’s 19th party congress however, Xi did not explicitly mention this old growth pledge, neither did he make any announcement about new long-term economic growth targets. Instead he replaced the quantitative growth target by a vaguer commitment of building a “moderately prosperous society” by 2020, envisioning China as a modern socialist country by 2035, while committing to cement China’s existing system - the so-called “Socialism with Chinese characteristics”. This shift away from ambitious long-term growth targets indicates a focus on quality of economic growth, not quantity. In fact, sustained high growth that the Middle Kingdom experienced last year, could give China’s policymakers more confidence in tackling major long-standing issues, such as reducing the risk of a rapid build-up of debt produced by years of credit fueled growth,taming financial risk and the property sector, and cracking down on pollution. What has happened so far?

China’s deleveraging 

China’s debt has picked up sharply since the recent global financial crisis. According to the Bank for International Settlement (BIS), total non-financial sector debt—which includes household, corporate and government debt— reached 257 percent of GDP in the second quarter of 2017. A recent report from the IMF stated that it expects
China’s debt burden to continue to rise strongly, reaching almost 300 percent of GDP by 2022. In order to conduct a gradual deleveraging in the financial sector, Chinese authorities already started to tighten their monetary stance. Accordingly, market interest rates such as China’s sovereign bond yields have picked up together with interbank lending rates. The latest increase in interbank rates happened right after the US Federal Reserve increased rates at its final meeting 2017. China’s central bank, the PBoC (People’s Bank of China) followed, raising two key short-term interest rates by 0.05
p.p. each - the seven-day reverse repurchase rate rising to 2.5% and the 28-day reverse repurchase rate to 2.8% - representing the third rise in repos last year. As China’s market interest rates rise, companies and households face higher borrowing costs.

Reining in the overheated property market

Government measures to cool hot housing prices are also expected to start affecting the overheated property sector. Higher mortgage rates have already shown some effect, with property investment cooling, growing at 7% in January to December 2017, down 0.5 p.p. compared to the first 11 months. Moreover, ongoing housing purchase restrictions in many large cities, such as higher down-payment requirements and restrictions on buying second homes, are expected to continue to weigh on the housing sales growth and  housing prices. According to Reuters calculations, price growth in
China’s housing market more than halved in 2017.

Crackdown on pollution

China’s astonishing economic growth over the last few decades was achieved at the cost of smoggy skies, polluted water and massive waste production. To address these issues, China is undertaking its strongest environmental push, significantly increasing the enforcement of environmental rules in order to reduce pollution. The pollution crackdown overlaps with the need to rein in excess output of steel, aluminum and other basic materials. The Middle Kingdom is sending troops of inspectors to steel mills, aluminum smelters, coal companies and other manufacturing units throughout the country, ordering them to sharply reduce output or shut down in order to
enhance its pollution problem. Moreover, China’s Ministry of Environmental Protection is launching a winter-campaign lasting from October 2017 to March 2018 in 28 northern smog prone Chinese cities, ordering them to reduce industrial activity in the attempt
to cut the average concentration of PM2.5 particles by 15 percent year on year. According to the Ministry a total of 62,000 factories were penalized between April and November 2017.Furthermore, a recently published report from Greenpeace East Asia states that the PM2.5 concentration in the affected northern region dropped by 33% during the last quarter of 2017.

Amid efforts to rein in the debt burden, cool down the property market and clamp down on pollution, many experts expect a slight cooling of the economy in 2018. However, infrastructure spending will still be ongoing to a certain extent and growth in new sectors could mitigate the potential slump in traditional industries.

Opportunities in a changing Chinese economy

China’s ongoing transition to a consumer driven economy as well as its ambition to become an innovation leader are creating opportunities in new sectors and growth in a changing Chinese economy.Specifically, three factors can be identified as major driving forces:consumer spending growth, investments in technological innovation, as well as investments in health care and the environment.
China’s services sector accounts for over half of the country’s economy and continues to report robust growth, with an 8% growth rate outpacing the overall economy. As Chinese consumer spending is steadily on the rise, sectors in the retail, travel and tourism industry are growing. Moreover, the high-end manufacturing industry is expected to further benefit from China’s ambition to upgrade its industrial ecosystem. According to a recent report from Morgan Stanley, the International Federation of Robotics has estimated 21% average annual growth for robots in the Chinese market from 2017 through 2019. Besides, China is the world’s largest market for electric vehicles and strong demand is expected to persist, according to UBS estimates. Furthermore, manufacturers for testing equipment for air and food quality are likely to benefit,with food safety and environmental improvement becoming top priorities of the Chinese government.

Further Information

Josipa Markovic is the economic analyst at the German Chamber of Commerce Shanghai. For all economic updates and information about surveys published by the German Chamber of Commerce,she can be reached at markovic.josipa(at)sh.china.ahk.de 

Feature 3 - Why Many German Companies Still Struggle with WeChat

By STEPHAN MAYER

With more than a billion registered accounts and 963 million active users, WeChat is China’s most important social network. A growing number of German companies have been using WeChat in order popularize their business among Chinese netizens. Despite the growing number of features available for businesses, there are still many obstacles for German companies.

To ensure social media marketing success, companies need extraordinary concepts and ideas. This is particularly true for the ever changing Chinese market, where customers often have significantly different expectations than their counterparts in the West.

For more than three years, WeChat has been the most powerful online marketing tool for German companies in China. There is no better way to reach out to suppliers, potential employees, or clients. Roughly 768 million netizens log into WeChat every day and spend about 40 minutes on average chatting, viewing moments,and using WeChat’s many features. 200 million users take advantage of the popular payment system WeChat Wallet.

Subscription vs. Service Account: Which one is more suitable?

WeChat offers companies the opportunity to present themselves through “official accounts”. Official means that a Chinese business license is needed in order to apply. From the various types of official accounts, subscription (订阅号– dìng yuè hào) and service accounts (服务号– fú wù hào) are the most common ones. Companies may use corporate accounts (企业号 qing ye hao) for internal communication.

Subscription accounts are most useful for B2B companies that are new to the Chinese market and primarily want to brand themselves through a large quantity of news content. Service accounts allow companies to offer more features to WeChat users through APIs.

They allow for instance to add a payment option or a database con taining a list of products or services. Unaware of the differences however, a lot of German companies still struggle with the decision making.

APIs and H5 pages offer a wide range of benefits

Companies use APIs in various ways: Lufthansa provides WeChat users with flight plans and a booking system, the famous Bavarianstyle Paulaner restaurant allows people to book tables online, order food and provide discounts. B2B companies such as BASF have integrated recruitment portals. Others use APIs to illustrate and animate production processes or give other insights into their company structure.

Another useful feature for both B2B and B2C companies are H5 pages. H5 pages are HTML5 based websites integrated into official accounts, which can be added to service or service accounts. They can be used to promote internal and external events, such as trade fairs, conferences, and road shows. Many of the H5 campaigns contain contact or application forms, animated graphs, and sound.Third-party monitoring software helps businesses to track the performance of campaigns. It collects the number of views, shares and in rare cases also user IDs.

Registration and setup frequently pose problems

Even registration and setup of an official account frequently pose significant obstacles for German SMEs. In order to open an official account, a company needs to provide a business license. It takes up to ten working days until Tencent approves an account opening request. To attract potential clients to the business an additional verification is recommended. In order to be verified, companies need to submit a certain number of additional documents to Tencent and pay RMB 300.

At the end, it all comes down to localized, high-quality content. Marketing campaigns that work out effortlessly with German or American clients can often not directly be transferred to the Chinese market. German products enjoy a premium image among Chinese and customers, who are often ready to pay much higher prices for them than for domestic brands.

This, however, comes with significantly higher expectations in terms of quality and after-sales service. If companies fail to satisfy customers, they may face serious consequences. Volkswagen, for instance, has been struggling for years with a gearbox problem and most recently a faulty fuel pump. For small brands that are new to the Chinese market and have little budget, negative comments on social media are even harder to overcome than for the large multinationals.

Brand names should not disappoint WeChat users

Companies often struggle with the adequate Chinese translation of their brand names. BMW and Knorr offer successful examples.They call themselves 宝马 (bǎo mǎ) ‘precious horse’ and 家乐 (jiā lè) ‘happy house’. Others used to be less successful. Search engine provider Bing initially called its product 病 (bìng) ‘sick’. Coca Cola 蝌蚪啃蜡 (kē dǒu kěn là) ‘female horse stuffed with wax’. Later these were changed in favor of more suitable names. Companies should ensure the brand name to have a positive connotation not only in Mandarin, but also in other major dialects.

Businesses should also pay attention to writing their welcome message, which WeChat users receive once they start following an official account. Paulaner says: “Finally you are here! Embark on a journey of German high-end food and beer art. We are the beer lovers’ dream right in front of your eyes. Paulaner provides you with a menu filled with traditional Bavarian cuisine, international dishes and current food trends.” It is best to include phone number and office hours there so that potential clients will find it easier to engage.

How companies build up a solid follower and customer base

Once the account is set up, it is important for companies to frequently post messages tailored to their target audience. Companies should have detailed knowledge about when potential clients are most active on WeChat and most willing to engage and purchase.Different audiences may be active during different times of the day making it crucial to thoroughly track customer behavior before developing large-scale campaigns.

Another important factor is Key Opinion Leaders (KOLs). Depending on their industry, companies should partner with singers, filmmakers, but also professors, bloggers or architects that have a large follower base on social networks. KOLs can be useful to spread a positive brand image among the company’s target audience. Many businesses, however, still fail to develop a comprehensive strategy risking the loss of significant amounts of money and finding it hard to build up a solid follower and customer base.

Montblanc succeeds with Hugh Jackman and customizable pens

Companies with large marketing budgets can boast successful campaigns: Montblanc, a German manufacturer of luxury writing instruments, watches and jewelry, impressed WeChat users with a very unique campaign last year when raising awareness of its morethan hundred years of corporate history. The campaign allowed consumers to retrace and become familiar with the products and gain a thorough understanding of what has turned Montblanc into a luxury brand.

For its campaign, Montblanc successfully reached out to the famous Australian actor Hugh Jackman. On the company’s corporate WeChat accounts, users could find a letter written in Chinese characters stating: “Art cannot change the world, but it can change the way people think – and people can change the world.”The second part of the campaign focused on the ability to provide consumers with a valuable brand experience. Users had the opportunity to customize a Montblanc pen by choosing its color. After this, they were encouraged to share their experience on WeChat.

How to be Successful with a Limited Budget

Even companies with a limited marketing budget can reach out successfully to their Chinese target audience. Following months of consideration, ROI Management Consultants opened an Official WeChat Account in June 2017. On October 2017, at the China Industry 4.0 Awards ceremony held in Shanghai, the Munich-based company asked Sinophilia Consulting Ltd. to create a quiz where participants were asked to answer questions about the implementation of Industry 4.0 mechanisms in their companies. Those, who shared the quiz on their ‘Moments’, were eligible to win a high quality Raumfeld sound system.

Upon launching its WeChat account, ROI decided to create an editorial plan, which stipulated number and content of the articles for the months prior to the China Industry 4.0 Awards. In order to boost traffic, content was shared into groups and through private accounts. Within less than four months, the number of views per article increased from 22 to 255.

Conclusion: German companies should make WeChat a top priority

For almost all German companies, WeChat marketing is now a necessity. Not being on WeChat means essentially not being visible for a very large proportion of Chinese netizens and as consequence losing marketing share to competitors. Many German companies,however, still fail to see this problem. Gao Xin, General Manager of the headhunting company Asia Solution, that specializes on small and medium-sized German B2B companies, says that merely 20 to 30 per cent of his client companies have WeChat accounts.

Companies, which want to be successful on WeChat, need to have a well-thought-out marketing strategy. They need to allocate financial and human resources efficiently and for many companies it may be worth considering KOLS in order to boost the popularity of their brands.

Further Information

Stephan Mayer is a social media expert and founder of Sinophilia Consulting Ltd. a rapidly growing agency with staff in three countries and two continents. He helps German and other foreign companies with online marketing in China. His clients include Messe Munich, Schaper & Brümmer, Voxeljet and Bertelsmann Foundation. Founded in 2012, his blog is one of the most influential German resources about Online Marketing in China.

Feature 4 - Shanghai Wants to Strengthen its Position as China’s Leading Spot for Foreign-funded R&D Centers

By YU RONG, ZHANG FAN, AND STEFAN GIGL

s.justl(at)storymaker.cn

On October 2017, the Shanghai Municipality published the several opinions on Further Supporting Foreign-Invested Research and Development (hereinafter “R&D” in short) Centers to Participate in Shanghai’s Construction of Science and Technology Innovation Center with Global Influence (Hu Fu Fa [2017] No. 79). For this purpose, Shanghai has already issued many regulations in different aspects, for example the Implementation of Accelerates the Land Planning Policy regarding the Construction of Science and Technology Innovation Center with Global Influence (Hu Fu Ban [2017] No.69) that refers to Land-using and Opinions on Encouraging Development of Foreign-funded R&D Centers since 2012.

R&D activities are strongly encouraged in China with preferential tax policies like super deduction of research and development expenses. Being recognized as high-tech company, their income shall be subject to enterprise income tax based on the preferential tax rate of 15%. For R&D Centers, VAT shall be fully refundable for imported and purchased equipment. Besides, Shanghai has introduced the land purpose as R&D in 2013 which is unique in China in response to the conflict between the existing classified land management practices by purpose and the new economic development.
The R&D land belongs to the industrial land but has a higher building bulk volume and lower price than commercial land. Concerning this topic in 2016 and 2017 different regulations were published.

With these measures, Shanghai has already played an outstanding role in China. Up to August 2017, there are already 416 foreign funded R&D Centers in Shanghai, accounting for 1/4 of the total number in the Mainland and ranking first in the People’s Republic of China. Among the 416 R&D Centers in Shanghai there are 20 that invested over USD 10 million. Besides, the innovation achievements of these R&D Centers are remarkable. With publication of Hu Fu Fa [2017] No. 79, Shanghai wants to turn himself into an even better center for technology and innovation by promising to take a couple of support policies for R&D Centers in the future. In the following we will only focus on some main aspects:

 

Providing subsidies

Shanghai plans to offer subsidies and better access to governmentled projects for foreign research and development centers. The local government plans to give start-up subsidy of RMB 5 million and 30% of their rental for three years as long as their office areas do not exceed 1000 square meters and the rental per square meter does not exceed eight yuan per day. Presupposed that the R&D Centers have more than 100 researchers and an independent legal person capacity. Besides they support smaller R&Ds at establishing an “open innovation ecosystem” by connecting micro-, small- and medium sized enterprises with transnational corporations. To an open innovation platform established in a district they plan to give subsidies for the rent.

Improve the subsidy policy for patents

Concerning to the Opinions each patent authorized through the International Patent System PCT will be subsidized with a total amount of up to RMB 250,000, while the subsidy amount will be not more than 50,000 yuan for each country. In addition, for eachauthorized top-quality domestic invention patent can be given a subsidy of up to 15,000 yuan.

Encouraging R&D centers to participate in government-planned projects

In Section 6 of the Opinions Shanghai Municipality demands that “efforts shall be made to attract science and technology personnel of foreign-funded R&D Centers to join the expert tank for government-planned projects”. This shall happen for example through the Information Management Platform for Science and Technology Input with Shanghai Finance, which is a government-planned expert database. As well, foreign-funded R&D shall be encouraged to send their innovation achievements to service platforms, such as the National Eastern Tech-Transfer Center.

Strengthen the Protection of Intellectual Property

Shanghai Municipal promised that they will make effort to explore the development of one-stop comprehensive service with an integration of patent examination. They try to provide rapid confirmation of rights and rapid rights protection by giving priority in patent examination through channels such as the China Intellectual Property Protection Center. They want to enforce administrative law and judicial protection with increasing efforts of punishment on infringement and unlawful acts. Furthermore, they plan to strengthen the organization of facilities protecting Intellectual Property Rights. Because the protection of Intellectual Property rights was one of the biggest concerns for German Companies in the past, these announcing can be a move to the right direction. Concerning to the Business Confidence Survey 2016 of the German Chamber of Commerce, 63% of respondents indicated “intellectual property concerns” as a key reason for not engaging in R&D in China. In 2017, 68.3% more respondents indicated IP concerns as a key reason for not engaging in R&D.

Simplifying entry and exit policy

In order to turn Shanghai into a center for scientific and technological innovation the personal of foreign-funded R&D centers may obtain some advantages in terms of exit-entry permits. Chinese national talents applying for exit-entry permits to Hong Kong, Macao,Taiwan or abroad will meet the same visa validity periods as foreign talents. Moreover, for foreign talents it is possible to issue longterm (five years to ten years) multi-visit visa.

Outlook

These measures head for the right direction and are welcomed by German companies, as the innovation is often the core competence of German companies. It remains to be seen whether to these opinions/measures will follow concrete acts and regulations on the part of the Shanghai Municipal. German companies are concerned about this topic. In reference to the Business Confidence Survey 2017/18 of the German Chamber of Commerce, more than 40% of German companies have conducted R&D in China, however among the other 60%, 75.2% do not plan to establish R&D activities in China within the next two years. As there are still existing doubts in local IP right application and protection and technology transfer, the Shanghai Municipal plans to act against them, and GIC will continually follow up this topic.

Further Information

Sources:
1. Policy interpretation of Hu Fu Fa [2017] No. 79
2. German Chamber of Commerce Shanghai, German Business in China - Great Shanghai Innovation Survey 2017.
3. German Chamber of Commerce Shanghai, German Business in China – Business Confidence Survey 2017/2018.
4. German Chamber of Commerce Shanghai, German Business in China – Business Confidence Survey 2017/2018.  

Yu Rong is the Head of the Legal & Investment Department of the GIC in Shanghai.
Zhang Fan is a Project Manager of the Department.
Stefan Gigl is a German Rechtsreferendar and doing his optional stage at GIC.

More Than Business - Growing CSR in China

The First Corporate Social Responsibility Index for Chinese Listed Companies

By OLIVER RUI

Corporate Social Responsibility is a bit like broccoli – everyone knows its health benefits, but it still takes willpower to choose it over a slice of chocolate cake. While most large companies in developed countries have incorporated CSR practices into their strategies, it’s not yet a staple for many Chinese companies – though it should be. Besides contributing to social well-being, good CSR practices signal good governance, which usually means a healthy balance sheet as well.

This is why the author created the first Corporate Social Responsibility Index for Chinese Listed Companies. It is the first index that ranks them based on their CSR efforts and the impact they’ve had. For companies, the Index is a bit like a fitness tracker for corporate benchmarking that helps nudge them into improving their CSR practices. It’s also an important tool for investors, who need both financial and nonfinancial information when analyzing and evaluating listed companies.

The Index evaluates three areas of CSR practices: Environment, Society and Governance, using a measurement matrix in line with established international standards. Western companies listed in the US and Europe regularly release reports on their CSR efforts, therefore our Chinese Index relies on data from digital CSR reports and annual reports published by A-share companies listed on the Shanghai and Shenzhen stock exchanges. This inaugural Index used the companies’ CSR reports for 2016 that they published between January and May 2017.

Before discussing the challenges faced in compiling the Index and some of the findings, the author wanted to first recognize the companies that topped the rankings. Shenzhen-based telecommunications equipment and network company ZTE was number one, followed by the consumer electronics manufacturer TCL, China’s largest construction and real estate conglomerate CSCEC (Chinese State Construction Engineering Corporation), its largest joint-stock port operator SIPG (Shanghai International Port Group), and state-owned telecommunications operator China Unicom. The others from six to ten are Grandblue Environment, SAIC Motor, BOE Technology Group, Weichai Power Co., and Shanghai Fosun Pharmaceutical.

The entire 2017 China CSR Index comprises 50 companies – yet at the end of 2016 there were a combined total of 3,052 A-share companies listed on the Shanghai and Shenzhen stock exchanges. So why did so few companies make the Index? For starters, only a quarter of all Ashare companies disclosed their CSR reports last year; among those who did, many were not that detailed and lacked the data we required. CSR is about more than just donating to charity and trying to conserve natural resources. According to international best practices, company CSR reports should also include disclosures of company operation and management, product quality and innovation, responsibility to employees, and diversity, all of which our Index analyzes.

Since the Chinese listed companies have such an overall low rate of disclosure, when launching the Index, the authors thought it would be better to start by publishing the top 50. This takes Chinese culture into consideration – if a best-to-last ranking of the 792 companies who disclosed at least some information was published, the ones at the bottom would lose face. Instead of motivating them to improve their CSR practices, it would make them more likely to stop reporting their information altogether in order to avoid another low ranking. We want to encourage disclosure, not stifle it, and we hope companies will strive to be included on the Index.

The industry with the highest level of disclosure was finance – it was found that 87% of the listed companies in this sector published an annual CSR report in 2016. This can be explained by the fact that financial companies are subject to higher regulatory standards, and are more conscious of the need to maintain their reputations. Across all
industries, state-owned enterprises (SOEs) had the highest rate of disclosure – of the 792 companies that published an annual CSR report in 2016, 60.10% were SOEs; 34.72% were private listed companies and 4.29% were Chinese-foreign joint ventures (0.88% did not fall into one of those three categories).

How a company can improve its CSR practices varies by company and industry. The best place to start is to look at improvements related to a company’s industry – for example a mining company should focus on anti-pollution efforts and a service industry company should focus on its employees.  

Looking at the data from the Chinese companies who released CSR reports in 2016, it se some areas where most companies could use some improvement. One is Product Quality and Innovation, which includes patents, R&D expenditures and proportion of R&D personnel. The companies we had data for filed an average of 108.31 patents in 2016. It

should be noted that ZTE, which topped the author’s CSR Index, filed 4,123 international patent applications in 2016 according to the World Intellectual Property Organization (WIPO), the most of any company worldwide. The average R&D expenditure of these Chinese companies was RMB 479 million. Compare that to figures from Germany’s Federal Ministry of Education and Research that show that German private sector companies invested a total of almost 61 billion euros in R&D in 2015.

Diversity is another area where Chinese companies fall short of international standards. According to the 2016 CSR reports we reviewed,60.98% of those Chinese companies have females on their executive teams, but there was less than one female executive per company on average. Research underscores the many ways that companies benefit
from diversity. An example from a recent study the author of this article co-authored examined the impact of gender difference on corporate fraud in China between 2001 and 2010. The results showed that firms with a high proportion of female directors on their board and led by female chairpersons commit less fraud.

Then there is China’s philanthropy gap. The ranks of China’s billionaires grew by 101 in 2016, more than any other country, according to a PWC/UBS report, which noted that there were totally 318 billionaires in China that year. Yet China ranks 138th out of 145 countries on the 2017 CAF World Giving Index which measures the percentage of a
population that engages in charitable giving and volunteer work, as well as how willing people are to help strangers.

Looking at the Social Contributions and Charity that was reported by Chinese companies in 2016 CSR reports, 760 companies made an average donation of RMB 5.68 million, but the median amount was only RMB 415,000. While 115 companies donated over RMB 5 million, over half of the companies donated less than RMB 500,000. There are several reasons for this philanthropy gap. Most of the wealthy entrepreneurs in China are still young compared to their western counterparts;they are in their forties and fifties and have not yet begun thinking about philanthropic activities. There are not yet Chinese equivalents of the Bertelsmann Foundation or the Robert Bosch Foundation that have been in place for generations. China has lacked a regulatory infrastructure to support private philanthropy, as well as the transparency and good governance standards common in developed countries. This has led to several high profile scandals that made the public feel local charities were not trustworthy.

But China’s relatively low level of philanthropy isn’t just due to its developing economy status. Myanmar holds the top spot on the 2017 CAF World Giving Index, and Sierra Leone in Africa is number 12. There is a big difference in the attitudes of Chinese and western entrepreneurs towards wealth. Most Chinese entrepreneurs still regard a charity in the same way they would a for-profit enterprise – they want to get a return on their investment and see a tangible benefit for their business if they make a donation. Many in second- and third-tier cities consider a donation to be a tool for establishing political connections that should lead to some kind of deal or preferential treatment in the future.

However, despite these challenges, we are beginning to see a change in attitudes towards philanthropy among Chinese entrepreneurs. A notable example is Alibaba founder Jack Ma. Just before his company’s 2014 IPO he announced the establishment of two charitable trusts that are being funded by share options in the US-listed ecommerce giant.In December 2017, Ma announced an RMB 10 billion Alibaba Poverty Relief Fund that would be used to promote “positive social change and improve the lives of people in China”, according to a company press release.

Based on the data collected for the Index from the Chinese listed companies, the author also observed some positive trends in overall CSR practices. In 2006, only 19 Chinese listed companies released an annual CSR report, last year 792 did. The amount of information contained in the reports is growing. Though most are still less than ten
pages, the proportion of reports longer than 20 pages has been gradually increasing.

It’s our hope that by showcasing the companies who are leaders in practicing good CSR, our Corporate Social Responsibility Index for Chinese Listed Companies will motivate more entrepreneurs and enterprises to do so as well. Good CSR practices are essential for good governance. Disclosing this information is good for a company’s image with both investors and customers, and it will improve resource allocation and social welfare across China, but ultimately it is the Chinese companies themselves who have the most to gain.

Further Information

Oliver Rui is CEIBS Professor of Finance & Accounting and Director of the CEIBS Center for Wealth Management, CoDirector of the CEIBS Center for Family Heritage, and Zhongkun Group Chair Professor of Finance. He co-authored the Corporate
Social Responsibility Index for Chinese Listed Companies with the Center for Accounting and Financial Big Data Research, Shanghai University of Finance and Economics.  

06 | 2017 | GREEN GROWTH & SUSTAINABILITY

Foreword and full PDF

 

Whether the skies above the bustling metropolises or rolling green hills of China are clear or darkened by pollution, whether we can see them with the naked eye or not: environmental issues are undoubtedly among the biggest issues facing all of us working and living here in China. China’s rapid economic growth – with GDP growth averaging ten percentage points for a decade – has taken its toll on the environment. The government, the business community and academia has acknowledged the need to act and address China’s environmental degradation.

This issue of the German Chamber Ticker will be all about facing the reality of environmental degradation and concurrent green initiatives, business ideas and solutions to help your business to emerge from the haze of pollution. We will shed light on how recent incentives in China’s green industry will affect your investment plans, we will look into stationary and mobile air purification systems and provide insight into how Beijing’s new push for environmental enforcement will impact your day-to-day business in China. And, building on our previous issue about innovation in China, we will also look at how Internet of Things (IoT) technologies are enabling new possibilities for enterprises to achieve cleaner and more efficient operations.

As you can see, there is no shortage of ground to cover when it comes to green growth and sustainability in China. As always, the German Chamber of Commerce in China Shanghai remains committed to helping your business flourish in China, especially in this “new, green normal”.

We hope that you will enjoy this month’s German Chamber Ticker!

Yours Sincerely,

Simone Pohl

 

Download the PDF here

Cover Story 1 - A China Carol

The Ghosts of China Past, Present, and Future
By JOHN PABON

In Charles Dickens’ holiday classic “A Christmas Carol,” Ebenezer Scrooge plays host to three unlikely guests. Transporting Scrooge to a more innocent era, the Ghost of Christmas Past reveals a time where childhood friends and family were more important than money. The Ghost of Christmas Present introduces Tiny Tim, a seriously ill child nonetheless overcome with the joys of Christmas. Looking ahead, the Ghost of Christmas Future paints a lonely death for the miser. With this, Scrooge pledges to change his ways. He undergoes a transformation taking him from despised to revered.

China, too, is presently having to grapple with ghosts of its past in hopes of creating a more sustainable future. A half-century of economic progress at all costs has been replaced with some of the strongest environmental policies in the world. Behind the haze of smog emerges a global leader in sustainability. This new China is investing great sums into green technology, innovation, and a burgeoning service economy. In the spirit of Dickens, let’s follow China as it goes through its own cathartic, transformational moment in history.

The Ghosts of China Past

China has faced an uphill battle shaking off the ghosts of its past. The country is fighting 30 years of unfettered development, lax regulation, and a wild-west attitude towards environmental protection. The result? Images of smog-choked cities, purple-hued rivers, and slave labor etched into the minds of people the world over. Erasing these pictures will be no small feat. 

As the world’s factory, and with the GDP increasing ten percent year on year, few were willing to rock the boat of progress. By the mid-2000s, Chinese farmers were using 35% of the world’s nitrogen fertilizers. The misuse of this and other fertilizers, as well as pesticides, seriously impacted the country’s land and water table. The global obsession with the latest electronics meant villages in China’s northeast choked by graphite residue, the chief component of lithium-ion batteries. Further south, in China’s manufacturing heartland, unscrupulous managers drove employees to suicide through overwork and mistreatment.


At the same time, the world also treated China as its personal dumpster. The massive shipping containers filled with cheap goodies from China returned home filled with scrap and recyclables from overseas ports. Over time, this created a €4.2 billion industry. In the United States, for example, scrap is the country’s sixth largest export to China. Essentially, China became home to the world’s waste. While much of this could be recycled or repurposed, the unsavory conditions for sorters, and lax environmental management, detrimentally impacted the Chinese mainland. Earlier this year, China passed new regulations prohibiting the import of 24 varieties of this foreign solid waste.

Perhaps the biggest tipping point for China came in 2007. This was the year China overtook the United States as the world’s largest emitter of carbon dioxide, years ahead of predictions. It was then that the government put real focus on benchmarking the true extent of the environmental situation. By 2014, officials had found 60 percent of the country’s groundwater quality to be substandard and 16 percent of the land to be polluted. The British Shadow Minister for the Environment at the time summed attitudes up perfectly. Following a tour with Chinese mayors, she noted. “…they fear that the external world is pointing and laughing at the stage which China’s environment has reached – it’s a kind of loss of face.” This loss of face, more than anything else, has led to a new path for China.

The Ghosts of China Present

Tiny Tim, an ailing boy from the poorest parts of Industrial Revolution-era Camden Town, embodies the spirit of opportunity through adversity. Once mocked as the sick man of Asia, China has its own vision of opportunity on a cleaner, greener path. Premier Li Keqiang heralded the opening salvos of the country’s war against pollution in 2014. He noted ill health and thick smog as “…nature’s red-light warning against the model of inefficient and blind development.” Unlike Tiny Tim, however, China has been able to invest heavily in making their vision a reality.

Infrastructure and Green Investments

Where this is most apparent is in China’s massive investments in infrastructure and green technology. Take, for example, the country’s rail network. China currently has over 121,000 kilometers of rail lines. Over 20,000 of these are high-speed tracks, more than the rest of the world combined. Trains speed through farmland at 350 kilometers an hour, making car and airplane use increasingly obsolete. Not already satisfied with the world’s most extensive rail network, China will invest an additional €427 billion by 2020 on expanding service. Bloomberg reports this will connect 80% of the country’s cities, bringing inclusive development to often poorer inland centers.

The efficiency of the network was top of mind as the author sat on a New York City bound train from Boston this past summer. It took almost five hours to go the 346 kilometers between the two cities. Only a week before, the author had traveled the 1,200 kilometers from Shanghai to Beijing in less than four hours. There are now plans to cut this time down even further, widening the gap between rail transport here and the rest of the world.

Investments in clean energy also highlight just how committed China is to change its future for the greener. Since 2005, there has been a 15-fold increase in clean energy investment. In 2015 alone, China spent €86 billion. This was two and a half times more than the entire European Union, which has seen signif icant decreases in spending over the past five years. By 2020, China will be investing €328 billion annually on clean energy. This will not only significantly green the country, but also add an estimated 13 million jobs to the market.

Regulation and Rule of Law

 

This war against pollution would not be possible without changes to regulation and the rule of law. For the first time in 25 years, China updated its environmental protection regulations. A central tenet of the new law would be harsh penalties and a naming-and-shaming mechanism for highly polluting companies. Individuals would also face repercussions for their actions. These include management of polluting companies as well as Party leaders.

Since the revisions passed in 2014, the government has levied record-breaking fines on companies throughout the country. To date, over 18,000 companies have been fined a total of €112 million. Inspections have also led to the discipline of 12,000 officials to varying degrees. Although recent data shows nearly 60 percent of China’s companies still fail to meet environmental compliance standards, it’s clear this new net will eventually catch them.

Technology and Innovation

To ensure a healthy return on its green investments, China is also encouraging innovative uses of technology. When the author wakes up in the morning, the first thing he checks isn’t his Facebook or email. He opens his air quality app to look at pollution levels. And, it’s not only air quality that technology is making more transparent. Smartphones now inform people, in real time, the emissions from individual factories, polluted wastewater levels from specific waterways, and labor strikes in every province. A growing awareness of sustainability issues foments a virtuous cycle of advancement.

China is also doubling down on automation. Xi Jinping has called for a “robot revolution” that will spur domestic productivity. The country is investing billions into increasing China’s robot-to-worker ratio as a way to encourage a cleaner, greener supply chain. Guangdong, China’s manufacturwing center and home to a vast majority of the country’s factories, is leading this charge. Between 2016 and 2019, the province will invest €127 billion to subsidize robot purchases at 2,000 of its largest manufacturers. The goal is to automate 80 percent of the province’s factories by 2020.

The Ghosts of China Future

Scrooge’s most cathartic moment was attending a funeral with the Ghost of Christmas Future. Not only was the poor soul buried alone, but thieves also came to rob the grave. Disgusted by this, Scrooge insists on finding out who this man was and what deeds led to such an undeserving fate. On finding out the man was him Scrooge vowed then and there to change his ways.

For China, the writing was on the proverbial wall a long time ago. Seeing this, they have not only invested heavily into today’s China, but have set an innovative vision for the future forward. Made in China 2025 gives us a glimpse of what a future China will look like. It is one where the world’s factory is now the world’s premier service provider. This is a China that prides itself on innovation and leading the world in the creation of new ideas. It is a China no longer reliant on the whims of the export market, but one standing on its own two feet.

Made in China 2025 draws inspiration from Germany’s Industry 4.0 plan. It rests on the pillars of innovation, quality, and technological advancement to spur domestic competitiveness and intelligent manufacturing. While the goal is to advance the entire country’s economy, there is particular emphasis on ten key industries. These include information technology, automated machine tools and robotics, high-tech shipping, agricultural machines and food security, modern rail transport, and new-energy vehicles and equipment. All of this combined, according to Will Knight of the MIT Technology Review, aims to “…overtake Germany, Japan, and the United States in terms of manufacturing sophistication by 2049, the 100th anniversary of the founding of the People’s Republic of China.”

In making such public pronouncements and investments into a more sustainable future, China is very much in the middle of a Dickens-like transformational moment. They know where the past leads and are unlikely to go down that same road again. Not only would this run counter to the Government’s intended narrative, but also call into question the legitimacy of their intentions. All of this comes at an extremely interesting time for China and indeed the world. Nearly two years after the Paris Accord, with its own legitimacy and long-term sustainability spurious at best, China now has the opportunity to position itself as the de-facto leader in global sustainability. More than moving from the world’s factory to a service-oriented economy, perhaps this is the China for which the future should prepare.

Further information

John Pabon is the founder of Fulcrum, a strategic consulting firm focused on sustainability in Asia. He has spent the last 15 years promoting sustainable development and stakeholder engagement, including work with the United Nations, McKinsey, and A.C. Nielsen. Over the past six years, he has also chronicled the societal impacts of China’s economic rise in his blog, John’s Little Green Book, recognized as one o fthe world’s top 100 sites on China. He is a regular contributor to China-based business magazines and speaks to an array of global audiences on issues of sustainability and societal change. Fulcrum website: www.fulcrum22.com John’s Little Green Book website: www.johnpabon.weebly.com 

Cover Story 2 - Green for the Internet of Things

Global Imperative for Climate Actions 
by JIAWEI ZHAO

The 2016 Environmental Performance Index from Yale University showed that over 3.5 billion people, or about half of the world’s population are living in countries with unsafe air. 10% of the world’s deaths are caused by air pollution. This environmental crisis will likely be exacerbated by another 30% increase in energy demand by 2040, with a corresponding 35% increasing in carbon dioxide emissions, as projected by the International Energy Agency.

Given the severity of the issue, environment protection has become a key concern for China. At the 2015 Paris climate summit, China’s President Xi Jinping pledged to cut the country’s carbon emissions per unit of GDP by 60-65 percent from the 2015 levels by 2030.

Specifically, the 13th Five-Year Plan targets a 15 percent reduction in energy intensity, and 10-15 percent reduction in emissions of toxic gases and volatile organic compounds from the 2015 levels by 2020. Furthermore, the government’s “Made in China 2025” also laid out Green manufacturing initiatives. Manufacturers are expected to reduce their industrial energy consumption, carbon dioxide emissions, and water consumption per unit of industrial value added by 34, 40, and 41 percent respectively, and increase utilization rate of industrial solid waste by 79% (all from 2015 levels).

Previously, green initiatives often required fundamental changes in both operational and management processes to realize the impact. However, the advent of the Internet of Things (IoT) technologies is enabling new possibilities for enterprises to achieve cleaner and more efficient operations.

Internet of Things (IOT) as an Enabler for Green Industries

The internet of things (IoT) is the system created by connecting physical devices to the internet (also known as the ‘cloud’). IoT’s power to enable green operations lies in its ability to gather precise data needed to run analytics for actionable information serves to drive smarter decisions to optimize business processes, operational efficiency, and resource utilization. Global e-Sustainability Initiative (GeSI), a global advocate for the use of technology to drive a sustainable future, estimated that digital solutions could cut 12.1 gigatons of carbon dioxide equivalent from global emissions per year by 2030, holding emissions at today’s levels.

As industry experts are forecasting 50 to 200 billion devices will be internet-enabled by 2020, the sheer scale and ubiquity of IoT has the potential to have a transformative effect on many different industry sectors. According to SAP, one of the world’s largest software companies, manufacturing, and logistics and transportation are the two industries that could enjoy massive emissions cuts by digitizing their business processes and applying data to optimize resource use.

Digital Factory

Manufacturing in China has transformed the country — and the world economy with it. Today, this sector is continuing its dramatic evolution into ‘smart factories’ by integrating manufacturing technologies with information technologies enabled by IoT. In fact, so transformational is the expected impact of IoT on the factories that some are predicting a fourth industrial revolution (‘Industry 4.0’) to spring from its use. The German National Institute of Science and Engineering estimates that Industry 4.0 can help factories improve energy efficiency by at least 30 percent.

An example of energy saving opportunities is in the behavioral control of the fleet of interconnected robots by algorithms. In 2016, Lennartson & Bengtsson found that the robot fleet’s energy consumption can be reduced by up to 30 percent without jeopardizing the overall production time, just by minimizing their acceleration.

Such optimization algorithms are also applied to yield improvement. By collecting massive production data and using artificial intelligence to find correlations between input and output parameters, production conditions can be adjusted based on variable changes to achieve optimal output in real time. This allows manufacturers to get more output from the same unit of input and resource efficiency.

By marrying connectivity and new manufacturing technologies (3D printing or additive-layer manufacturing) and the production of prototypes or products with small lot sizes, rapid prototyping technologies can be much cheaper, quicker and more energy-efficient. Furthermore, factory equipment maintenance management is also revolutionized. Equipment monitoring and self-diagnosis will trigger accurate and effective predictive maintenance, while some spare parts are printed as needed by accessing drawings off the cloud. This would reduce wastage in the form of defective products from faulty equipment, or even spare parts inventory obsolescence.

An even bigger game-changing potential is to address end-to-end business processes. The digitization of the entire value creation ecosystem enables direct link to the customer. By integrating user experience into new product or service development, on-demand customized products become technologically feasible. The reduction to customer-requested features will help save resources, versus today’s ‘all-inclusive’ default option. Furthermore, connecting data from the factory with the wider business can optimize production and productivity to deliver what customers need, when they need it. This elimination of ‘over-production’ and ‘over-spec’ can further reduce waste.

Connected Logistics and Transportation

In China, logistics activities account for 14.9 percent of gross domestic product according to the 2016 Commerce Logistics Operations Report. In addition to being economically significant, logistics is also emission intensive. CDP – the NGO holding the most comprehensive set of global corporate environmental data – reported that supply chains can be responsible for up to four times the greenhouse gas emissions of a company’s direct operations. However, the good news is, virtually all the activities in logistics and transportation can leverage IoT and big data to drive operational improvements.

IoT can improve visibility of products along the supply chain: from data of packages leaving the factory or warehouse, materials handling equipment, delivery vehicles, up to the end customer. China’s leading e-commerce and technology companies are leveraging IoT to drive warehouse and factory management improvements. Alibaba and JD.com have constructed massive warehouses fully-operated by IoT. Huawei and DHL are piloting a cross-functional IoT system for inbound deliveries to automotive factory. With these ‘intra-location’ visibility, businesses are able to predict, correct, and even prevent problems such as inventory outages, failed equipment, poor delivery conditions, and safety hazards before they occur, keeping their supply chains running efficiently. This additional visibility would further create fleet efficiencies, improve fuel economy and reduce deadhead miles, which account for up to 10 percent of truck miles, according to the global logistics provider, DHL.

Real time insights also allow logistics operators to optimize delivery routing. The global package delivery company UPS has designed their vehicle routing software to eliminate as many lefthand turns as possible. This resulted in a reduction of 10 million gallons fuel consumption while delivering 350,000 more packages every year. Predictive indicators from platform analytics can further optimize delivery decisions in real time. Hundreds of thousands of data points can be analyzed at each moment — tweets about labor strikes; potential congestion caused by natural or man-made disasters; correlation of shipping path and speed with weather forecasts — to arrive at the optimal delivery routes.

IoT also allows operators to effectively track and manage their fleet remotely, and provide need-based instructions. Saia, an American trucking company, leveraged IoT to track the vehicle’s maintenance needs, driver safety, fuel usage and several other metrics in real-time. The program led to a 6% decrease in fuel consumption. With IoT, fleet operators can also assemble trucks into platoons along delivery routes to achieve aerodynamic efficiency that can save up to 20% on fuel costs (Massachusetts Institute of Technology, 2016).

Addressing the Challenges of IoT Deployment

While IoT has demonstrated its green credentials, it’s worth acknowledging there are potential challenges in its implementation.

Cost of technical integration: Adoption of advanced computer-controlled operations and automation could be daunting and costly. Costs of IoT hardware, infrastructure, and applications can vary widely depending on a multitude of factors, making it difficult to accurately capture the costs. Given the iterative nature of IoT deployment, a three-phase integration approach can be considered: prototyping, learning, and scaling. Interfacing off-the-shelf solution to an existing industrial setup to pull metrics and experimenting with data flows can be a no regret first step. With the learning of the systemic implications enabled by prototyping, firms can then model costs and business case behind their IoT strategies. On this basis, firms can tackle the incremental complexity of adding more connectivity and operational implications such as network communications, administrative labor, and technical support.

Industry standards around IoT: There are many competing connectivity standards today, with no real oversight over protocol development. Nevertheless, rather than waiting around for standards to coalesce, firms setting out to add IoT to their business today should approach the decision-making based on business needs. That is, clearly defining the business requirements, and then looking for a standard that will enable them.

Security and privacy risks: Malicious hackings on enterprise networks are increasing in rate and scale. For that reason, IoT systems must include security features in both the software and hardware, including processors, chips, and sensors embedded in all areas of the IoT. Furthermore, lesson learnt from the ransomware attack on Britain’s National Health Service is that the ‘deploy and forget’ approach is dangerous. All IoT devices must be managed over their lifetime so they can be updated with patches to deal with new threats.

Lack of required skillsets: Implementation of IoT requires not only technical integration but also a shift in culture and capabilities. Many traditional industries have workforce that in many cases is simply not trained in software and analytics. To ramp up this core competence, enterprises are hiring talent with IoT capabilities in order to use the IoT more extensively. Even more are providing workforce with training to work with the IoT. Some are adopting operational systems already infused with IoT features to reduce the implementation hurdle rate.

Further Information

Jiawei Zhao is Managing Director of Porsche Consulting, China. He has decades of experience working with startups in Silicon Valley, India, China, and ASEAN countries in various capacities, including as founder, team member, consultant, as well as investor. He can be contacted at jiawei.zhao(at)porsche.cn.

Cover Story 3 - China’s Air Pollution Problem

Background and Solutions for Stationary and Mobile Air Purification
By ROBERT F. WOLF

In September 2017, a scientific research was published which revealed that more than 1.1 million people in China die due to the massive air pollution per year. As shocking as this number is alone, a further finding of this study showed that in the People`s Republic, air pollution causes a shorter lifespan of three years in average. Only a mere 1% of China`s urban population is surrounded by air which is considered safe by the standards of the European Union. But the air pollution problem of China is not only limited to the nation itself. It also affects neighboring countries like South Korea, Japan and is even noticeable all way across the vast Pacific Ocean on the west coast of the USA.

Since China’s economic reforms and the opening policy in 1978, the country`s GDP nominally grew to second place internationally, just behind the USA, surpassing Germany in 2008 and Japan in 2010. China`s impressive economic miracle unparalleled in human history in such a short time, has lifted hundreds of millions of people out of poverty in only one generation. But this economic miracle came at a high cost - the air pollution in many Chinese cities is among the highest in the entire world and many Chinese are exposed to heavily polluted air and above that also to undrinkable water and contaminated food. Seasonality also plays an important role in the pollution situation in China. Especially during the winter months between October and March, heavy concentrations of micro particles in the air are a severe threat to the health of hundreds of millions of people all over the country.

The reasons for this problem are various. Among the most influential ones is the burning of coal for heating, which explains the extraordinary high air pollution during the colder winter months. Further important factors include industrial pollution, car emissions or agricultural emissions among others.

Among the most dangerous of the pollution particles floating in China`s air are those below the size of 2.5 micrometers (PM 2.5). These reach deep into the body and are causing sore throats, cough, breathing problems, asthma, bronchitis and in the long run even cardiovascular deceases like heart attacks, strokes and neurological problems or even various forms of cancer. According to the Chinese Ministry of Health, industrial pollution has made cancer the leading cause of death in China. A shortened lifespan of three years in average in China due to air pollution as mentioned before, is a costly charge for the economic rise of the Chinese dragon. In northern China, where it is more heavily polluted, the lifespan is even shortened by a staggering five and a half years.

The World Health Organization (WHO) considers a concentration of more than ten micrograms of PM2.5 particles per cubic meter air in annual mean as a danger to health. In previous years, measurements in several northern Chinese cities in the winter months showed recorded levels of PM2.5 nearly or even above 1,000 micrograms per cubic meter. On a yearly average, Beijing's PM2.5 air concentration was 73 micrograms per cubic meter in 2016, which showed a gradual improvement compared to the previous years. In all of 2016, Beijing had 39 highly polluted days with levels above 200 micrograms of PM2.5 per cubic meter, which represented a decline by 10% compared to the previous year. The Chinese central government has acknowledged the problem and is acting swiftly.

To fight the dangerous effects of air pollution, the Chinese central government has implemented far reaching policies to lower pollution to acceptable standards and improve the livelihood of its citizens. Among these policies are massive investments in renewable energy sources like wind farms to reduce the country’s reliance on coal-fired power plants, reducing the use of fossil fuels, and subsidizing electric vehicles. The heavy industry is also at the center of attention. The decision to close 103 coal-fired power plants was made in March 2017, and the steel production capacity will be cut by another 50 million tons. A strict implementation of anti-pollution laws upon the private sector forced factories to be shuttered, relocated, to partly downscale production or to install expensive air scrubbers. Chinese cities encouraged its residents to replace coal stoves and furnaces at home to contribute to the national goal of cleaner air. On top of that, heavy investments were undertaken by the Chinese government to switch from coal burning to the usage of - compared to the latter - cleaner natural gas. This is producing water and carbon dioxide when burnt, instead of the dust and smoke that coal produces during the burning process. Of course, also the emissions of the growing number of private cars on China`s streets are in focus and strict emission standards which are comparable to those in Europe will be implemented by 2020.

Still, it will be a perpetuating process that will need time and patience to reduce China`s air pollution problem. Other solutions need to be found to bridge the time gap between the current air pollution problem and acceptable and non-health endangering levels.

The industry has developed many innovative products to fight air pollution on a small scale and a private level in the previous years. The most common and best-known are stationary air purifiers that filter the ambient air of a limited and closed area. Many homes and offices have these air purification machines already, yet the market is still further growing. Foreign enterprises have an especially high reputation among this product branch. This goes along with the increasing importance of a healthy lifestyle in urban populations of China in recent years. There is an ascending willingness of Chinese customers to spend money on their quality of life and health.

But people don`t spend 24/7 in closed and well air-isolated rooms. They commute to and from work, they go out to exercise and shop. Children go to school, dogs are walked on the streets and simple things like strolling the city sidewalks on a lazy Sunday are avoided due to the air pollution. The most common solution for protection from polluted air while being out on the streets are the well-known air pollution masks. These are ubiquitous available in convenience stores as well as super markets, pharmacies or online shops. Among these are surgical masks, disposable masks and reusable masks where filter change is possible. Despite being unfashionable and uncomfortable, many people wear them to protect their health.

Nowadays, totally new innovations offer attractive solutions for health-conscious customers. Most recently, more and more smaller air purification machines entered the market. These can be put in the car, on the office desk or even used as necklaces. A totally new generation of small and light-weighted electronically driven air purification machines integrated into clothing like fashionable scarfs, combining high-tech with fashion, is available now. These machines are not mere masks, but high-tech miracles and work the same way as the big and heavy stationary air purification machines, yet are smaller and lighter than smart phones. People now can literally wear an air purification machine with motor, filter and pollution detector around their necks. These machines are connected via bluetooth to smartphone apps. German, Japanese and American companies have been driving this development, some of them with a start-up approach. This new generation of mobile air purification devices allows Chinese customers to stop thinking twice about a walk on the streets, a shopping tour in the city with friends, commuting to work, a run along the river or sending their own children out on the way to school on days with high air pollution levels.

These products are also designed to heal the flaws of the only previous ways for mobile air purification - the air pollution masks. To combine high functionality and quality with fine industrial and fashion design, easy usability with a still affordable price is the unique selling proposition of this first generation of real mobile air purification devices. These do not only filter polluted air but some of the technologically most advanced newcomers to the market even create a bubble of clean air around the head while being integrated in clothing, most recently in scarfs. Especially German companies lead here the way due to their high competence in engineering, environmental technologies and industrial design.

China has shown an impressive ability to change itself for the better of its population`s welfare and has grown to be the world`s second biggest economic power. The problems that come along with this quick development can not only be found in the People`s Republic, but also many other rapidly industrializing nations, including Europe which had similar air pollution problems just a few decades ago. Europe has mostly overcome these issues due to strict policies for the protection of its citizens' health and livelihood and China has also followed these steps. Yet, for the years to come, protection from air pollution for everybody living or visiting China is an investment in a longer and happier life. German companies have identified this market need and bring all their innovation power to the table to better the living conditions of millions.

Further Information

Robert F. Wolf is the General Manager of De Jie Air Purification Equipment (Shanghai) Co. Ltd., which developed the first Mobile Air Purifier under the brand of Livtech乐态. The company is a start-up of Alfred Kärcher GmbH & Co. KG. For more information, please visit http://livtech.cn/en or contact Mr. Wolf directly at Robert.Wolf(at)de.kaercher.com

Cover Story 4 - Investing in Green

How Will Recent Incentives in China’s Green Industry Affect Your Investment Plans?
By KRISTINE HORBACH

 

When planning investment in the green industry in China, it is important to consider not only the current investment climate for renewables, but also the influential financial incentives introduced by the Chinese government.

Rapid economic development has come at a high price. China is internationally renowned as being the world’s largest polluter with both air and water pollution reaching alarming levels. In fact, in March of this year, the Ministry of Environmental Protection stated that PM2.5 and PM10 concentrations needed to be reduced by as much as 60 and 50 percent respectively in the Beijing-Tianjin-Hebei area to meet national standards.

Amidst serious health concerns, with international and domestic pressure, this problem cannot be ignored. To improve pollution levels, the Chinese government has begun not only to invest heavily in the green sector but has also started to introduce investment incentives and preferential policies within the sector. Investment in various industries is actively encouraged, meaning that market entry is significantly easier for both domestic and foreign businesses. It is vital to remember however that although there are definite opportunities and advantages for foreign investors, some sectors still remain restricted and protected to guarantee support for local companies who continue to significantly dominate these markets.

Therefore, before making the decision to invest, it is essential to conduct a thorough due diligence and research of your specific sector in order to understand where the potential opportunities, and also challenges, may lie. This article will focus mainly on three sectors within the green industry: solar power, wind power and electric vehicles.

Current Investment Climate: Wind Power, Solar Power & Electric Vehicles – Challenges & Opportunities

Challenges
A significant hurdle facing foreign companies seeking to invest in the green sector is competition from local Chinese companies. Foreign investors should be aware that local enterprises do remain dominant across all three markets: wind power, solar power and electric vehicles. In 2006, approximately 40 percent of the wind power market in China was dominated by local companies. Today this number has risen to a total of 98 percent of the market. Likewise, out of the world’s top ten solar panel producers, six are Chinese according to the New York Times.

The electric vehicle market is even more dominated and protected with Chinese local companies possessing 93 percent of electric vehicle sales, American automaker Tesla controlling a further six percent, which leaves a mere one percent to other investors.

Opportunities
While competition from local companies cannot be denied, investing in China’s green industry does come with many opportunities. China is the largest producer of wind turbines, solar panels and electric vehicles in the world, with half of the world’s wind turbines and approximately two-thirds of the world’s solar panels manufactured in China.

For each of these industries, the country possesses highly ambitious targets and has actively encouraged foreign investment to successfully accomplish this. China hopes to increase wind power capacity by over 30 percent by 2020: from a total of 169 gigawatts at the end of 2016 to 250 gigawatts in 2020, and then to a total capacity of 495 gigawatts by 2030. Regarding solar power, plans are in motion to increase capacity from 77.42 gigawatts at the beginning of this year to 110 gigawatts of solar power capacity by 2020. Targets are high for the electric vehicle industry as well, with Beijing hoping to establish five million charging stations by 2020 and up to 80 million by 2030. Not only does the government look upon help from foreign companies to meet these capacity targets, but foreign investors often have the ability to compete with local companies possessing advanced and experienced technology and expertise in the sectors. In this way, they can be an attractive target for joint ventures. A notable example would be that of Volkswagen and JAC to produce 100,000 electric vehicles a year in China.

In addition to considering general incentives, foreign investors should not neglect to research their target industry for industry specific opportunities. For those considering investment in the auto industry for example, it should be noted that foreign auto brands are regarded as highly prestigious among Chinese consumers, and China still struggles to develop internationally renowned brands. Consequently, foreign companies can lever a certain advantage in recognition, value and reputation. Particularly in targeting the higher-end consumer, foreign companies still play a major role.

Furthermore, it is worthwhile researching specific sectors for financial incentives, such as the introduction of green bonds which can also play a major role in aiding your investment in China.

Investment Incentives: Green Bonds

On 2nd March 2017, the China Securities Regulatory Commission (CSRC) released a new set of guidelines to support the issuance of green bonds to decrease China’s pollution levels and to encourage environmental protection. According to the People’s Bank of China (PBOC), since public investment is not sufficient to meet funding demands of green initiatives, green bonds have become a powerful supplement. They represent a definitive attraction for foreign companies seeking to invest in the industry, helping green companies to succeed in China and allowing China to alleviate its environmental issues, including air and water pollution, at the same time.

Naturally in this way, not only are green bonds popular at a national level, but also at a regional level. Regional governments contend to receive funding for new projects and initiatives, whilst simultaneously helping China to gain international recognition for its effort in solving the various environmental issues and alleviating concerns. In fact, in 2016, almost 40 percent of the number of green bonds issued that year were released in China, totaling an excess of over RMB 200 billion. While over 80 percent of bonds were issued in Shanghai, Fuzhou and Beijing for projects in sectors such as clean energy and transport, it is important to note that green bonds are not only issued to green enterprises. Rather, the issuance of green bonds is dependent on the type of project and whether it can be qualified as “green.” In June of this year, a power producer in Tianjin succeeded in issuing “green bonds” worth RMB 1 billion to finance a coal-fired power plant.

There are numerous incentives and opportunities available to both foreign and domestic investors considering entering, or already established in, the green sector in China. This coupled with huge support from the Chinese government at a national and regional level makes this an exciting and very much available sector to invest in. As with any investment, this does of course come with challenges and hurdles of domestic competition and various restrictions, but one should not be discouraged. With a clear, well-thought out investment plan, the green sector is one in which foreign investors do have the opportunity to thrive and succeed.

Further Information

Ms. Kristine Horbach is Head of the German desk at Dezan Shira & Associates. Dezan Shira is a professional services firm, assisting foreign companies with establishing, maintaining and growing their business operations in Asia.
She can be contacted at kristine.horbach(at)dezshira.com.

Cover Story 5 - China’s Environmental Enforcement

Understanding How the Environmental‘New Normal’ Will Affect Your Business
By JULIA COYM

Environmental enforcement has become a major business risk for companies operating in China – especially in the manufacturing sector. The fact that China’s manufacturing slowed down at the start of the fourth quarter only underscores how serious China’s leaders are about enforcement. Additionally, at the 19th Communist Party Congress, Xi Jinping affirmed the party’s commitment to the environmental agenda as part of its plan to address social issues resulting from years of rapid growth. The message is clear: Environmental protection now takes precedence over economic growth.

But environmental enforcement has also become more complex – focused on more than emissions or waste management. Environmental enforcement is now an essential tool in executing Beijing’s industrial policy agenda, forcing companies to not only review their environmental compliance procedures, but also to adapt their wider stakeholder engagement and risk assessment.

A long time coming

A spate of factory closures in the third quarter of 2017 left many companies in a tailspin trying to understand what sudden development had compelled officials to shut down their operations or the ventures of their suppliers. However, while these shutdowns were unprecedented, they were not unexpected.

In 2015, the then newly installed environmental protection minister Chen Jining said environmental enforcement in China lacked teeth. But with new powers and the top Chinese leadership’s political backing, Chen committed the Ministry of Environmental Protection (MEP) to take action to protect the environment. It is a promise that Chen (who was recently promoted to Beijing mayor in May) has executed vigorously; the MEP has proven its bite can be as fierce as its bark.

The entry into force of the Environmental Protection Law (EPL) in 2015 signalled dramatic changes in environmental enforcement. One-off fines for polluters were so low that they disincentivised compliance – after all, it was cheaper to pay the fine and continue polluting. The EPL instead introduced new fines – that would accumulate every day until the violation was resolved – to prompt companies to upgrade their facilities.

An environmental army

The EPL went further than that, it gave proverbial teeth to a range of actors – from national officials to prosecutors and even to non-governmental organisations – to go after polluting companies. Environmental NGOs received the right to file public interest lawsuits directly against companies, and have since done so successfully against both foreign and domestic firms.

Environmental officials at the national level also received a significant boost in enforcement powers. Systematic environmental inspections from 2016 have been modelled after those carried out by the Central Commission for Discipline Inspection (CCDI – the ruling Communist Party of China [CPC]’s top anti-graft watchdog) in order to increase their clout. MEP inspectors have also been given special authority to supersede provincial officials of equal or higher rank whom they are investigating. Except for the anti-corruption drive, such powers are unprecedented.

Inspections and regular shutdowns

The effects of those powers have become increasingly clear in the latest two rounds of national environmental inspections. With reports of tens of thousands of companies – primarily Chinese – being closed down in the third quarter of 2017, the latest two rounds of the central government-led environmental enforcement campaign have reached unprecedented levels. This has led to – in some cases public and high profile – calls for help from multinational companies that have had their supply chains suddenly disrupted or their own factories shut down for months at a time.

Authorities have been unsympathetic. In the past two years, the MEP has repeatedly warned of poor compliance and of intensifying enforcement. The MEP and its local and provincial counterparts said that factories subject to closures had received warnings – in some cases numerous – and that they had made very few exceptions.

The national inspections are only one part of the latest wave of environmental enforcement, but they are a bellwether of rising enforcement. The environmental crackdown must be understood as part of the new normal. Those who deny this will be proven as wrong as those who first dismissed the anti-corruption campaign as ‘merely political’ and ‘certainly short-lived’.

Environmental and industrial policy in one

An important trend that has emerged in the latest centrally led environmental inspections is that enforcement has extended beyond environmental issues. Inspections have been conducted not just by environmental authorities, but by local industry regulators as well. Companies shut down generally fell into the categories of 小,散,乱, and 污 (xiao – small, san – scattered, luan – messy, and wu - polluting). Numerous companies compliant with emission rules were closed down if their business licences, certificates or other documents were not in order.

China’s senior leadership is merging environmental goals with wider industry aims, particularly with regard to cutting overcapacity and upgrading industries. Smaller, inefficient operators will not be allowed to reopen. This can also be seen in the intensifying relocations for manufacturing companies in recent years. The government views this as an essential part of upgrading China’s economy, but poses serious risk to companies’ supply chains, as their suppliers may suddenly find themselves unable to deliver.

It also threatens to apply further pressure to companies disadvantaged by industrial policies such as ‘Made in China 2025’. Emissionintensive, low-value manufacturing will increasingly be moved out of China, as authorities tighten restrictions on which industries they welcome in their jurisdiction. Foreign companies have been and will continue to be held to higher environmental standards than many of their local peers by officials, as well as the public and media. In industries where stricter environmental enforcement will significantly raise costs that hinder competitiveness, foreign companies may find it even more difficult to maintain their market shares.

Further changes to environmental stakeholders

As part of this process, the roles and responsibilities of government officials will continue to evolve. Industry regulators are being assigned greater responsibility for ensuring environmental compliance in the sectors they supervise. The latest inspection rounds involved both environmental and industry bureaus, which conducted physical inspections as well as regulatory and policy reviews.

Moreover, environmental authorities are being freed from potential conflicts of interest, with the central leadership introducing vertical reporting structures (in which each environmental agency reports to a more senior environmental agency, rather than their local government heads). Local mayors in those jurisdictions, and the rest of the country, have seen their influence on environmental issues erode. They can no longer overrule environmental restrictions or penalties.

The environmental new normal – what now?

All these changes position authorities to more extensively and more frequently monitor and inspect for environmental compliance. To respond effectively to these changes, companies need to understand the drivers and the timing of wider enforcement, to stay ahead of local government and sector-specific trends as well as one-off investigation and shut-down triggers such as industrial accidents or seasonal pollution.

The changes also require companies to renew and intensify their communication on environmental issues with all regulators. Going forward, how companies account for and justify their environmental performance and their environmental contribution will become much more essential, not just when dealing with environmental inspections, but for all regulatory approvals.

Finally, the latest inspections serve as a good reminder that companies need to have oversight of their entire supply chains, and ensure suppliers are also environmentally compliant and prepared for the shifting regulatory and enforcement trends. As seen in the latest inspections, this is not just about environmental audits. It is also about conducting thorough due diligence on business partners and identifying any compliance red flags that indicate there are current or likely future environmental or business issues.

Further Information

Julia Coym is a Senior China Analyst with Control Risks, an independent, global risk consultancy specialising in political, integrity and security risk. They help some of the most influential organizations in the world to understand and manage the risks and opportunities of operating in complex or hostile environments. They support clients by providing strategic consultancy, expert analysis and in-depth investigations through to handling sensitive political issues and providing practical on the ground protection and support.

In the Spotlight - No Loss of Know-How, No Job Reductions

Interview with Mr. Wolfgang Müller, Senior Advisor of IG Metall Bavaria District
By LYDIA SCHULZ

Mr. Wolfgang Müller has been working with IG Metall Bavaria since 1999 and was member of the supervisory boards of Audi, Schaeffler and Siemens. As Senior Advisor of IG Metall Bavaria, he conducted a survey in 2016/17 on the relationship of labor unions and work councils and their Chinese investors. The report is accessible in German on the website of Hans Böckler Foundation. On 1st November 2017, he presented his findings at the School of Government at the Sun Yat-sen University Guangzhou. Mr. Müller has a strong connection with China; He has spent more than two years in Beijing in 1977 after his studies in social sciences. Today he advises works councils and trade unions on China and has led a China tour for work council members and IG Metall representatives in October 2017.

Dear Mr. Müller, for your survey you interviewed the work councils and trade unions of 42 companies with Chinese investors. Which topics were part of your research?

For this study, I interviewed work councils and employee representatives as well as representatives of trade unions responsible for these companies and interrogated them on various topics like: When was your company acquired? How is the relationship with the management and the Chinese owners or investors? How did the entry of Chinese investors influence collective agreements, relations within the company and the working atmosphere? Is there a direct contact of trade unions or work councils in Germany with their counterparts, Chinese company unions?

What was the main finding of your study?

The main finding was that Chinese companies accept German standards of wages and working conditions and the rights of co-determination. The fear of the overall public opinion in Germany and often distorted by the media, that there would be massive job reductions and an outflow of know-how is currently unfounded. I can’t promise that the behavior of Chinese investors towards German subsidiaries won’t change in the future, but this is our finding of the current situation. The biggest fear work councils expressed, was what would happen to them when there is an economic crisis in China and whether they would be the first one affected. In contrast to the public and political opinion, there is a very good relationship at this point.

What about the fear of an uncontrolled outflow of know-how?

In the context of the acquisition of KUKA, there was a hot discussion in the media as well as politics whether China extracts Germany’s know-how. As soon as the know-how is lost, fabrics in Germany would be dispensable, leading to shut downs of factories and a cutting of jobs.


The loss of know-how is hard to validate empirically. Therefore, my question was whether work councils evaluate research and development in Germany as increasing or decreasing. I chose this criterion as an increase of R&D activities in Germany can’t exist when there is an outflow of know-how. A transfer of know-how to China, that a machine that once was developed in Germany is now build in China, well, that is the right of every owner!

However, work councils stated that they don’t fear to lose their jobs in the near future as the precision, for example for special machinery, can’t be completely documented in blueprints and therefore not simply copied. This precision cannot yet be produced in China. Even a factory with Chinese owners for over ten years is still producing some high-precision products in Germany. The interviewed work councils gave an all-clear on this topic and reassured that now there is no problem.

Was this result a surprise for you?

Yes, I was surprised. In not one single interview was a worsening of the situation after an acquisition by a Chinese investor reported. In most cases there was not a big change, often an improvement of work relations and that Chinese shareholders and owners made further investments, which were long overdue. Some Chinese shareholders even build up direct contact to the workforce via the work council. Chinese investors seem to value work councils high as they represent the high quality Germany stands for. The work council seems to represent the skilled staff producing German quality. Therefore, the statements were throughout positive, what surprised me in this unambiguousness.

So Chinese owners made further investments after the acquisition?

Yes, as I already said, Chinese investors are open to make investments that are overdue because the old family owner had no money, or the private equity group had no interest in it. In Aschaffenburg, the Chinese state-owned enterprise Weichai Power build a new factory for Linde Hydraulics. The work council had made demands for this investment for ten years as the old factory was too small. They finally got it from the Chinese investor.

Is there a difference between private and state-owned enterprises?

At the moment, there is no significant difference between the investment of a private company and a state-owned enterprise. My hypothesis, which got confirmed by the survey, was that state-owned enterprises are rather long-term oriented. And as state-owned enterprises have to work close with party trade unions, therefore the work council is also accepted in Germany. They take over German law and norms when they enter the German market and these institutions are part of that.


For private companies, the car electronics manufacturer Preh Group in Bad Neustadt, Franconia is a good example. They were acquired by a private investor from Ningbo five years ago. He invested and upgraded the factory. He even bought a hotel for accommodation. The fear, which we often have in Germany about the future of Germany as a location for business is unfounded.


In Germany, we have experience from the last 20 years with investors who cut jobs when they enter a company. Chinese investors are not like this! Reasons for this might be, that companies were already made “lean” by the previous owners, so there is no need to cut further jobs. But it seems like Chinese investors are just very different from American investors, finance investors, who first improve the rate of return by cutting jobs. With Chinese investors that doesn’t happen!

A few years ago, you were asked to build up a work council network for German companies with Chinese investors. How did that happen and how did this network develop?

It was in 2011. I received a phone call from the work council of KION. They were about to get Chinese owners and they wanted to meet other work councils from companies with Chinese owners to exchange their experience. Well, and now we have annual meetings. The meetings developed just like the Chinese investors’ community in Germany. In the first year, 8 to 10 companies participated, all from Baden-Württemberg and Bavaria. In the second year, 15 to 18 and in the third year already 30 companies came, and there are more and more companies joining, just like the investments are growing.

What about challenges with Chinese investors? Did they tell you about problems or changes they have to deal with?

One thing is that Chinese investors don’t know the German system, especially not the employee representation. The topic of co-determination is entirely unknown, it is probably not important for them at all. The employee representatives on the other side know well how to deal with German owners or American ones. But Chinese owners with another culture were something completely new and they didn’t know how to address to them.


The problem was, and still isn’t entirely solved: In some companies the work councils don’t have any contact to the investor. They would like to have some. German mid-sized companies, especially when the owner is a single person or a family, are often located in provincial towns. Therefore, there are often direct connections to the owner, which are important. To talk to the owner, outside of official meetings, when there is a problem in the company, when the manager doesn’t want to listen, then the owner can be contacted directly. Well, and this isn’t possible with Chinese investors. It’s not possible to just contact them. This was and still is a problem. I always suggest contacting the owners directly. This can also mean to send a letter to a state-owned enterprise in Beijing or Shenzhen or wherever the headquarter is and ask for a representative to talk to in person. In many cases this worked: A Chinese representative came to the work council and a direct contact to the owner had been established, outside of the normal chain of command.


In the case of ChemChina, China’s biggest chemical enterprise, who did not just acquire Pirelli and Syngenta, but also Krauss Maffei in Munich, two representatives of the work council were invited to Beijing before the acquisition took place. The work council stated before, that they don’t have any general objections against a Chinese investor. The boss of ChemChina who had invited them was surprised because elsewhere, with other takeovers by ChemChina he had experienced strong objections from the unions.

You just traveled China with a delegation of work councils. What was their impression of China?

First, our group was deeply impressed from the dynamics in the Chinese society infrastructure we observed left a lasting impression - compared for example with the low speed and quality of internet connections in some areas in Germany.


We have mainly looked into the automotive sector in China. We´ve got the strong impression that the future of the automotive industries in the world is ever more decided in China - not only with EVs, but also with customer preferences etc. That would have major repercussions also for the automotive sector in Germany where a big share of its high profits comes from China.

How do you see the future of Chinese investments in Germany?

I believe that in the future, Chinese investments will go on. Out of question. They will continue to invest in companies and obviously they won’t acquire companies no one is interested in. They will invest in companies like KUKA, which are famous and promise future growth.


In Germany, there is a discussion going on whether Chinese investors have a plan. Well, they should have! I think the discussion is ridiculous. Of course, Chinese investors decide strategically. They don´t look for a quick buck - at least not in Germany. How can we refuse Chinese to invest in strategic companies? And what is a strategic company? Are other industries less important?


In my opinion the economic policies in Europe are someway biased against China. At the same time, Europe is lacking a coherent industrial strategy whereas China has developed clever blueprints for industrial development (“Made in China 2025”) and for international economic planning (New Silk Road initiative) and is investing lots of money to support those plans. Maybe it is necessary to protect certain industries (steel for example) in Europe for some time against unfair competition from China.


But without a European blueprint for the development of certain sectors and high-tech industries and without the necessary funding for such an initiative, Europe is losing its industrial base and its future. Neither protectionism is the solution for the future of Europe nor austerity nor leaving the future to the market forces.

We should learn some lessons from China.

Mr. Müller, thank you very much for your time.

Mr. Wolfgang Müller, Senior Advisor IG Metall Bavaria, speaking with Ms. Lydia Schulz, Regional Manager Shenzhen, GCC | South & Southwest China

Feature 1 - Legal Update

China Amends Regulations on Environmental Protection of Construction and Production Projects
By DR. ULRIKE GLUECK, MICHAEL MUNZINGER, XU WANG

During the last years, due to the alarming situation of air, water and soil pollution in the PRC, the necessity and importance of a better environmental protection was brought into the focus of public awareness. Also the Chinese government continuously attached greater attention to this issue.

Starting from 2014, a series of laws and regulations related to environmental protection have been revised, updated and newly introduced in the PRC.

For example, on 24 April 2014, the Standing Committee of the National People’s Congress (“NPC”) adopted the revised PRC Environmental Protection Law which entered into effect on 1 January 2015. The revised PRC Environmental Protection Law, inter alia, introduced stricter penalties for continuous non-compliant acts, clarified the scope of potential plaintiffs which can initiate environmental public interest litigation and introduced a new chapter on environmental information disclosure and public participation.

The revised PRC Law on Environmental Impact Assessment (the “EIA Law”) was adopted by the Standing Committee of the NPC on 2 July 2016 and entered into effect on 1 September 2016. Newly introduced Administrative Measures for Filing Environmental Impact Registration Forms for Construction Projects (the “EIA Registration Form Measures”) have been adopted by the PRC Ministry of Environmental Protection (“MEP”) on 2 November 2016 and became effective on 1 January 2017.

The new PRC Law on Environmental Protection Tax which was adopted by the Standing Committee of the NPC on 25 December 2016 will enter into effect on 1 January 2018.

Further, on 29 June 2017, the MEP promulgated the Administration Catalogue for Environmental Impact Assessment (the “EIA”) of Construction Projects (the “EIA Catalogue”) which was updated in accordance with the EIA Law and entered into effect on 1 September 2017.

In order to keep the environmental protection laws and regulations consistent with each other, on 16 July 2017, the PRC State Council has further promulgated the updated PRC Administrative Regulations on the Environmental Protection of Construction Projects (the “Regulations”) which entered into effect on 1 October 2017. The updated Regulations reflect the updated stipulations of the Environmental Protection Law and the EIA Law. It is noteworthy that the Regulations not only apply to actual construction projects (such as the construction of buildings and plants), but also to production projects the establishment and/or operation of which will have environmental impacts (such as manufacturing and assembly lines), i.e. in other words to all production companies.

The following article will focus mainly on the updated Regulations and their practical implications. The main purpose for the revision of the Regulations was to simplify the environmental assessment procedures for construction/production projects. Key provisions of the Regulations include the following:

 

• The EIA Registration Form, which was originally required to be approved by the MEP or its competent local counterpart, i.e. the environmental protection bureau (“EPB”), now only needs to be filed with the EPB.

The EIA Law stipulates a classification-based management system on the EIA of construction/production projects. Such system is based on the potential impact of the respective construction/production project (and the later operation) on the environment. The applicant (applicant shall mean the company that will carry out and own the construction/production project in this article) shall prepare a comprehensive EIA Report for projects with potentially serious environmental impact, an EIA Statement for projects with potentially mild environmental impact and a simple EIA Registration Form for projects with only very minor environmental impact (hereinafter collectively the “EIA Documents”). Prior to the Regulations, all EIA Documents had been required to be approved by the competent local EPBs. However, the amended Regulations have now removed such approval requirement with regard to projects with potentially minor environmental impact, i.e. for EIA Registration Forms. EIA Registration Forms must now only be filed with the competent local EPB instead of being approved. The main difference between approval and filing procedures is the timeline. The applicant is not allowed to commence the construction before obtaining the approval, while as explained below, the deadline for the filing is before the completion and operation of the construction/production project. Also, the penalties for failure to obtain approval are much more severe than the ones for failing to make the filing.

According to the EIA Registration Form Measures, the EIA Registration Form for construction/production projects shall be filed online unless confidentiality is required according to relevant laws and regulations. Approval of the EIA Reports and EIA Statements can also be conducted online, although in practice certain local EPBs still require hard copies of the application documents to be submitted on site. The applicant shall, before the construction/production project is completed and put into operational use, log on to the online filing system, fill in the relevant information and submit the EIA Registration Form to the competent local EPB online.

 

• The timeline for the approval/filing of the EIA Documents has
been extended.

Before the entering into effect of the revised EIA Law and the revised Regulations, the EIA Documents had been required to be submitted for approval during the construction/production project feasibility study phase and the approval of the EIA Documents by the competent EPB was a pre-condition for the approval of the feasibility study report of the construction/production project. The Regulations, however, now clarify that the EIA Reports and the EIA Statements can be submitted for approval at a later time, i.e. before the actual commencement of the construction/production. Further, as mentioned above, the EIA Registration Form can be filed online before the construction/production project is completed and put into operational use. This means that the approval/filing of the EIA Documents by the competent EPB can now be done simultaneously with or after the approval of the feasibility study report and other approvals and/or recordals related to the construction/production project.

In addition, the approval/filing of the EIA Documents will no longer be linked with the business license registration by the competent Administration for Industry and Commerce. Previously, the approval/filing of the EIA Documents by the competent EPB was a pre-condition for the establishment of a new company in the PRC. i.e., prior to the application for the business license, the EIA Documents were required to be submitted to the competent EPB for approval. However, such requirement has been removed from the amended Regulations and now approval/filing of the EIA Documents by the EPB can be made after issuance of the business license.


• Certain circumstances which will lead to a failure of obtainingapproval of EIA Documents have been added into the Regulations.

The Regulations expressly stipulate that the MEP or the local EPBs shall make a decision on disapproving an EIA Report or EIA Statement under the following circumstances:

- the type, location, layout, or scale of the construction/production project is not in line with laws and regulations on environmental protection and the relevant statutory planning; or
- the environmental quality of the area where the construction/production project shall be located fails to meet the relevant national or local environmental quality standards and the remedial measures to be taken in order to meet the relevant national or local environmental quality standards cannot meet the regional environmental quality improvement targets by the local government; or
- the pollution prevention and control measures adopted for the construction/production project cannot ensure that the pollutant emission can meet the national and local discharge standards, or no necessary measures are taken to prevent and control ecological damage; or
- in case of a reconstruction or expansion project or a technological transformation project, no effective measures are proposed to prevent and control the original environmental pollution and ecological damage of the project; or
- the basic materials and data in the EIA Report or EIA Statement of the construction/production project are obviously false, contain material defects or omissions, or the environmental impact evaluation conclusions are unclear and unreasonable.

The above circumstances under which no approval shall be granted, have been newly added into the environmental protection legal regime and are an indication of the PRC regulators’ determination to finally actually improve the quality of the environment and respective regulatory control in the PRC.


• The applicant, instead of the competent EPB, shall be responsible for the inspection and acceptance of the environmental protection facilities of construction/production projects.

Previously, inspection and acceptance of the environmental protection facilities (such as filters for dust, sewage tanks, etc.) in construction/production projects was subject to the approval of the competent EPB. According to the revised Regulations, the preliminary design documents of a construction/production project shall contain a chapter on environmental protection and the implementation of measures for the prevention and treatment of environmental pollution and ecological damage as well as an estimated budget for environmental protection facilities. Further, the applicant shall include the construction of environmental protection facilities in the construction contract. After the construction/production project is completed, the applicant shall conduct an acceptance check of the environmental protection facilities and prepare an acceptance report which will not be subject to approval by the competent EPB anymore. Accordingly, the applicant itself shall be responsible for any non-compliance if the construction/production project is put into operational use despite of a failure to complete the environmental protection facilities or to inspect the facilities or to pass the inspection. Additionally, a “dual penalty” system is implemented: now, not only the applicant will be subject to administrative penalties, but also the personnel directly in charge or other responsible personnel. For the responsible personnel, a fine between RMB 50,000 and RMB 200,000 can be imposed. For the applicant, a fine between RMB 2 million and RMB 200,000 can be imposed (previously it was under RMB 100,000).

It is noteworthy that, although the competent EPB will not be involved anymore in the acceptance of environmental protection facilities used for construction/production projects, the competent EPB will supervise the construction/production projects during all phases, i.e. from their design, construction, acceptance and the later operation in order to achieve a more effective supervision and management. Further, for a construction/production project which requires an EIA Report or EIA Statement, after the construction/production project is put into operational use, a post-construction environmental impact evaluation shall be carried out according to the provisions of the EIA Law and the Administrative Measures for the Post-construction Environmental Impact Evaluation (for Trial Implementation) promulgated by the MEP which took effect on 1 January 2016. Also the punishment for not obtaining the approval of EIA Reports or EIA Statements has been increased: if the applicant commences the construction work without obtaining the approval of the relevant EIA Report or EIA Statement, in addition to suspension of construction, a fine from 1% to 5% of the total investment amount of the construction/production project shall be imposed.

 

• The Regulations have abolished the provisions on “trial production”.

Previously, if a “trial production” was necessary after the main construction/production project has been completed, the environmental protection facilities have been required to be put into “trial operation” together with the main construction/production project. The applicant should make an application for “trial production” with the competent EPB and the EPB should inspect the construction and implementation of the environmental protection facilities and other environmental protection measures. The construction/production project was only to be put into “trial production” after the approval of the competent EPB. In order to follow the rules in the revised PRC Environmental Protection Law and the EIA Law, the Regulations have now removed relevant provisions with reference to “trial production” and “trial production” is not subject to the approval of the EPB anymore.


• The Regulations further emphasize public participation, information disclosure and good faith management.

The Regulations further have the aim to increase the public awareness and governance with regard to environmental protection: the regulators shall take into account public opinions when preparing the EIA Catalogue; the MEP and its local EPBs shall process the approval/filing of EIA Documents through the internet and make all information available on the internet; the applicant shall, when compiling an EIA Report, solicit the opinions of the local entities and residents concerned; the applicant shall make the environmental protection facilities acceptance report publicly available, unless it is required to be kept confidential due to special laws and regulations; the MEP and its local EPBs shall record information on environmental illegalities and noncompliance concerning a construction/production project in the social credit file and timely disclose the list of offenders to the public.

The revised Regulations streamline the administrative procedures and lower the burden of the applicant by not charging any fees on businesses for the approval and registration of the EIA Documents. On the other hand, however, they emphasize supervision during all phases and increase the fines for violations and non-compliance.

The revised Regulations as well as the other above mentioned revised, updated and newly introduced laws and regulations demonstrate that the PRC government takes environmental protection seriously and that it is willing to start acting against environmental pollution and to increase the level of environmental protection in the PRC. This is definitively a positive signal. However, considering the shift to making the companies themselves responsible for inspection and acceptance of environmental protection facilities, it remains to be seen to which extent the above mentioned legal changes are effective and sufficient.

Further Information

Dr. Ulrike Glueck is Managing Partner of CMS, China.

Michael Munzinger is Senior Associate at CMS, China.

Xu Wang is Senior Associate at CMS, China.


Ranked as a Top 10 Global Law Firm, CMS can provide a full range of legal and tax service in 40 countries with 71 offices. Together with 4,500 CMS lawyers worldwide, CMS China (Shanghai, Beijing and Hong Kong) offers business-focused advice tailored to your needs.
For more information, please visit - https://cms.law/en/CHN/

Feature 2 - Buying Health Abroad

Chinese Customer Expectations Trigger International Patient Management Industry
By THOMAS KAPITZA

 

Though there is an astonishing lack of valid statistical data, International Patient Management (IPM) Industry is expected to be a growing business sector, serving Chinese customers and patients. Taking a closer look into the current situation, one thing is certain: Hopes are flying high for companies providing medical treatment and complementary services against the backdrop of a rapidly emerging Chinese healthcare system. China’s healthcare system is still facing a lot of challenges: Ongoing environmental pollution, expanding numbers of chronically ill patients, lifestyle-related health threats by nutrition, tobacco & alcohol consumption, difficult access to the top medical providers in Chinese hospitals, combined with a developing health literacy. This unique mixture of challenges might be a good reason that China´s middle class is thinking about treatment options abroad. Why not pay for health services while on vacation in APAC region, Europe or the US?

China`s economic development brought remarkable purchasing power and wealth to many different parts of Chinese society. The urban middle class is used to buying high-quality, imported goods and is also very interested in enhancing their individual quality of life. Increasing competition in business life and new methods of improving their body to magnify economic and interpersonal success could rise the willingness to shape individual health. This health consumerism doesn`t always seem to be fueled by specific health problems. On the other hand, Chinese patients might take a closer look at international treatment out of fear and in case of significant time pressure.

 

How to find trustworthy international health services

Asking family members, friends and social network contacts creates a lot of information and may result in first recommendations, but will only give little contribution to the process of finding the best way to exclusive short-term foreign medical care. The knowledge about the strengths and weaknesses of advanced international healthcare systems is often very low. Patients as potential IPM customers must rely on information provided by specialized commercial domestic travel agencies or broker agencies. One can´t buy health, but health supply has its price: Information about the expected medical outcome and agreed prices & services are essential to get a good feeling about the benefit of being treated abroad. What are important quality indicators for a potential IPM customer?

Trust as a precondition for successful treatment arrangements

To build trust and confidence in commercial, international health service offers, transparency is a helpful precondition. IPM service providers in China should be open to present their senior physicians network in Europe or the US to their customers verifiably. If they have framework contracts with highly reputable doctors and renowned medical facilities, they will inform their customers about these networks in detail. As in China, the treatment quality in many foreign healthcare systems mainly depend on the professional expertise of responsible physicians.

Preparation of health data support efficient medical treatment

These highly endorsed physicians are very busy and perhaps don´t like to wait for even a single patient. So, it is necessary that a patient´s health data is send to them, before the patient arrives onsite in Europe to ensure an efficient and fast treatment process. Every customer should pay attention to agency´s guidelines and standard procedures in preparing his or her health trip in terms of medical report translation, health data transmission prior to the trip and individual health fitness adjusted travel logistics. In this field of expert services, in the end nothing will be more harmful for the customers than to try to buy cheap.

Time pressure effects increasing service prices

If the customer may need urgent medical treatment, time pressure will weaken the buyer´s position. Most IPM services cannot be executed as medical emergency services. Before the start customers travel fitness should be cleared to avoid travel time extension and may result into delayed treatment start at the destination. So, if substantial time pressure appears, the agency service price may rise. Customers should clarify the medical purpose of their treatment and should get an understanding whether the IPM agency really understand their needs.

Service structure defines customer benefits and agency´s service prices

IPM services always include medical services, given by medical providers & professionals, and non-medical services like travel & accommodation arrangements, translation service and general client accompaniment during his or her treatment period. The medical services should include the physician-patient talks during anamnesis (clarification of medical history and current health status), diagnostic and therapeutic medical treatment and final meeting (with discussion of the final medical report). These services should be defined and agreed in detail in agency`s contract before signing their contract. Mostly the prices of these services are given by the foreign treatment facility. For instance, in Germany most medical services and their prices are published inside official fee scales for hospitals and outpatient/ambulatory medical services. In comparison to German prices the US prices are up to 3.5 times higher, although most of the medical destinations in EU and US are both approximately eight to ten flight hours away from China. Usually there is no difference in the medical treatment quality between these two regions.

Non-medical services are also important to enjoy a pleasant trip and a comfortable stay at the destination. These services may become very expensive e.g. if a 24/7 personal assistance (incl. translation services) is necessary. So, it is quite helpful and will build trust, when all planned non-medical services are listed with their prices (incl. country VAT) in the IPM contract. It may happen, that for non-medical services the costs are higher than the for medical services in the end. This is often a reason for customer´s dissatisfaction after their return home.

Medical services are the core of IPM products

Potential customers should try to decide, what kind of medical services they expect in Europe, especially in Germany. Do they need a second opinion from a high profiled medical professional, or do they just want to buy a general medical checkup including some recommendations to improve their daily quality of life? Maybe a surgery is planned or a comprehensive medical rehabilitation package at one of the German highly specialized rehabilitation centers is needed? In the end there are three results, that are basically im-portant for IPM customers: to get exact information about the disturbing disease (“health status information”) and good advice how to manage their illness or disability by themselves (“patient empowerment”); to get appropriate immediate medical treatment on best level of state-of-the-art medical expertise (“access”), combined with best medical technology and affordable but latest drugs (“state-of-the-art support”).

Germany as a IPM destination?

Only few Chinese people know, that Germany is not only renowned for their car industry, but also for providing excellent healthcare with reasonable prices, especially in comparison to other healthcare systems. The political and social stability of Germany is an excellent basis that foreign visitors, like Chinese health tourists or IPM customers are welcome and are free to move all around the country safely. The overwhelming majority of Germans trust their healthcare system and their physicians as impartial surveys confirm regularly. Currently the European IPM agencies are very interested to expand their business to China, because some IPM customer groups likes Russians (economic crisis and fluctuation in the currency) are not that present in Germany anymore. Additionally, there may be government plans to simplify visa procedures for health tourists and the IPM business sector. Despite of facing more rigid Chinese foreign travel regulations, but Germany is prepared to welcome and to take care of Chinese patients.

Further Information

Thomas Kapitza is senior business expert for healthcare sector and elderly care sector with professional expertise due to +250 projects since 1990 (EU, APAC, PRC, Russia, UAE, USA). He is a member of working groups of industrial associations, scientific advisory boards and strategic advisory councils. Additionaly he works as a publicly appointed and sworn expert (IHK) in Germany, and is also certified expert DIN EN ISO/IEC 17024:2012 (HC industry). Mr Kapitza is the only health sector expert with this scope of services in the EU, and holds a degree in business administration from University Munich. Since his first trip to China in 1991, he has been watching China´s expanding healthcare sector.

Feature 3 - Smooth Transitions

Employment Issues in China M&A Deals
by TRACY LIU

Employment law issues have the potential to significantly affect M&A deals in most jurisdictions and can play a crucial role in deciding whether a deal goes ahead smoothly. A slight problem in an M&A transaction brought on by an employment law issue can cost both transacting parties time and money. In the worst cases, the presence of certain employment-related matters can thwart a potential deal entirely and force it to be abandoned.

Given the colossal costs that can stem from these labor disputes, it makes sense that employers or potential buyers be proactive and take steps that will cumulatively lower employment-related risk. It is essential that any party to an M&A transaction fully understands the relevant provisions and application of employment law and that they take all necessary precautions to reduce the risks associated with the transaction.

This article aims to provide a review of some of the typical employment issues that commonly arise during Chinese M&A deals. It also offers practical recommendations to employers as to how they can combat and overcome employment-related issues thereby reducing the overall legal and business risks that are often present throughout Chinese M&A deals.

Impact of M&A Deals on Employment Issues

First and foremost, in China, the transfer of employees may only be effected by the termination and subsequent rehire of an employee. This differs somewhat to other jurisdictions, such as the UK, where employees are typically transferred automatically when a business is transferred from one owner to another. Moreover, due to the legal regime’s distinct way of handling the transfer of employees, a potential buyer may wish to weigh the advantages and disadvantages between acquiring the assets or acquiring the equity in the M&A deal, with the employment issues in mind.

Equity Deal
In an equity deal, the “employer” of the employees does not technically change when the seller’s equity in the target is transferred to the acquiring party. Chinese law does not require the new controllers of the company to enter into new employment contracts with the employees as part of the implementation of the merger since it is deemed that technically there was no change in the employment relationship. In an equity deal, from an employment perspective, the buyer merely steps into the shoes of the seller and the relationship between the employer and the employees is left undisturbed.

On the other hand, however, the negative consequences that come with an equity transaction are that the buyer will assume all pre-existing liabilities that the seller had incurred prior to the completion of the deal. In an equity deal the buyer will be forced to retain existing employees, including those which are underperforming and/or potentially redundant or surplus. In China, employers face increased difficulties, when compared with the UK or the USA, in carrying out restructuring after an M&A transaction due to the legal procedures that are in place. In practice, it is difficult for employers to produce the evidence necessary to meet the legal thresholds for ending employment for underperformance or redundancy.

Overall, however, in equity transactions, employers can be less concerned with employment issues that could potentially derail an M&A transaction because the employment relationship remains unchanged.

Asset Deal
In contrast, in an asset deal, specific assets and liabilities are acquired and taken from the seller by the buyer. This changing of hands brings with it a wider array of potential employment law concerns. There is often a need for consultation between employers and employee representatives when an asset deal is being considered as the deal will likely materially affect the interests of (at least some of) the employees. Unlike an equity transaction, an asset acquisition does not see the automatic transfer of employees and their contracts to the buyer. In order to transfer the employment arrangements to the buyer, the seller and its employees must first agree to terminate the existing employment contracts and then the amount of severance that is to be paid to the employee by the employer. Other issues such as unpaid salaries and benefits and who will pay these will also need to be addressed at this point before the deal can continue.

On the other hand, the buyer is placed in a strong position for negotiating their future employment. The new employer can negotiate new employment contracts with employees that can include terms and conditions which are more preferable to the buyer than those which were stipulated in the original contracts. Moreover, in an asset deal, the buyer bears no risk of taking on liabilities caused by the target’s previous non-compliance with PRC employment law. Additionally, the buyer also has the right to choose the employees it wishes to retain and can do so simply by entering into new employment contracts on a selective basis.

Common Employment Issues in M&A Deals in China

Severance Packages (Asset Deals only)
A common problem posed in M&A asset deals in China is that of severance: the transacting parties must agree on how to deal with the previous service period of each employee. Usually, this involves service years either being inherited by the new employer or being bought off by the seller upon termination. The latter allows for the new employer to employ the employees without having to recognize and subsequently pay out any prior service period. This does, however, come with other problems. In China, an employer must pay statutory severance calculated at the rate of one month’s average salary for each year of service. The “average salary” is the employee’s average salary during the preceding 12 months prior to the termination. The amount is also listed to an amount equal to three times the local city’s average salary during the last calendar year. A regular problem in the severance process is created by the fact that employees will often seek to take advantage of pre-M&A severance negotiations and use them as an opportunity to negotiate better terms with their employers. Employees will often ask the seller for much higher severance payments than they would be entitled to under the statutory calculations. There have been extreme cases where, when the seller refutes their demands, employees have resorted to protest, strikes and even violence. Therefore, it is recommended that the buyer choose to recognize employees’ service and have the service years carried over. Not only is the risk of unrest and uncertainty caused by severance negotiation avoided but furthermore, by recognizing the service years the buyer also reduces immediate transaction costs and avoids losing any crucial employees that could be key to the business.

Overtime Pay
Failure by a previous employer to properly pay its employees for their overtime work is another potential issue present in M&A deals in China. Normally arising in due diligence, this issue has the potential to leave a buyer liable for the monies owed by the previous employer to the employee as the liability for it will be passed in an equity deal. Employees will retain the right to claim any accumulated overtime pay against the buyer.

Employment Contracts
Another employment issue in M&A deals in China is where the seller has failed to take out valid employment contracts with its employees. In China, an employer and employee must sign an employment contract and this contract must be executed within one month of the date on which the employee starts working for the company. Failing to have employees sign employment contracts can prove to be a very costly mistake for employers. In fact, for every month after the first month that the employee works without an employment contract, that employee is entitled to double the wages for the period worked. The limit to this is set at an amount equal to eleven months wage and moreover, an employer and employee will have been deemed to have entered into an open-ended employment contract if they do not sign a written employment contract within one year of the date on which the employee starts work. In an equity deal, a buyer, having taken on the obligations and liabilities of the seller, can be exposed to civil claims resulting from the lack of employment contracts with the employees at the acquired entity.

Cyber Security in M&A Transactions
Another situation that may create employment law issues in M&A deals is where the protection of an employee's personal information is at risk. M&A transactions present greater risks to maintaining employee privacy because each company's email use regulations, social media policies and other aspects involving employee personal information are brought closer to the surface during such deals thereby creating opportunities for security breaches and theft of employee personal information. Under the PRC Cybersecurity law (CSL), it is illegal to expose the personal information of an employee to excessive risk. In order to effectively limit the chance of employee information being leaked, companies need to ensure that the purchase agreement contains provisions that adequately protect the employees’ personal information. The CSL also places stringent requirements on how organizations collect and protect new information. Consequently therefore, a key feature of the M&A transaction process will be complying with these and making sure that any personal information acquired during the transaction is protected. Proper due diligence should seek to outline any privacy and data security issues that could arise during the transaction before they can become an issue.

Conclusion and Recommendation

In conclusion, to avoid potential employment issues that are often present in China M&A deals, it is recommended that employers use employment lawyers as early as possible so that a full and thorough due diligence investigation can be carried out against the seller and all its employees. More often than not, employment issues can be detected by effective due diligence and remedied quickly before things have a chance to escalate. Indeed, buyers and sellers should work together in order to minimize the risk of unrest and instability. A detailed strategy as to how to effectively combat initial employee unrest should be devised in order to avoid workplace disgruntlement caused by the transfer escalating into full blown workplace unrest. Additionally, it is recommended that the buyer seeks contractual protection where they choose to assume liabilities from the seller. Pushing the seller to make representations and warranties over possibly hidden and unforeseeable additional costs, such as unpaid overtime, can help reduce risk and can offer the buyer indemnity with losses that arise from legal non-compliance with PRC employment law.

Further Information

Tracy Liu has extensive experience in employment law. She has been involved in both transactional and advisory work of various business sectors, including automotive, pharmaceutical, petrochemical, and fashion. Ms. Liu worked for Baker McKenzie in Shanghai for four years. Ms. Liu also worked for a leading German law firm in Shanghai for six years. Ms. Liu joined a PRC licensed law firm, Fieldfisher Shanghai Law Offices, as a Partner in 2017. She can be reached at tracy.liu(at)fieldfisher.com

Feature 4 - Protecting Your Property Rights

"Use" in the OEM Business Model According to Chinese Case Law
By GÜNTHER MARTEN

The annual damage caused by counterfeiting and piracy to the world economy is estimated to be around USD 461 billion. In the year 2013, this illegal trade amounted to some 2.5% of world trade and constituted some 5% of all imports into the EU. 80% of counterfeits confiscated in the EU and US came from China (including Hong Kong). Even though China has made progress in the protection of IP rights, the percentage of counterfeit products seized from China remains roughly the same. This may be due to the fact that the Chinese authorities are not sufficiently prosecuting the counterfeiting of goods intended for export. However, it may also be the case that Chinese case law does not regard the production of such goods as infringing IP law. The present article looks at current Chinese case law on the issue of Original Equipment Manufacturing (OEM).

The term OEM has different meanings. It mainly refers to the production of semi-finished products, which are used in a final product of another company. This is the case, for example, when polo shirts without a brand name are commissioned and delivered and the third company uses a (fake or genuine) logo or a (fake or genuine) trade mark on it. OEM also refers to the manufacturing of end products which bear, for example, another company’s brand name and are marketed by it. For the purpose of this article it is assumed that the corresponding goods are intended for export from China to a foreign company. The legal position of the proprietor of the genuine trademark is intended to be the focus of this article, namely if he is able to stop such goods at the Chinese border.

Cases are to be assessed on the basis of the Chinese Trademark Act of 2013. Art. 57 (3) - (7) lists cases which, among others, are considered an infringement of IP rights, such as the use, sale or offering of counterfeit goods. According to Article 48, “use” is defined as the use of trade marks on goods, packaging or containers, on merchandise and advertising, during exhibition and, generally, on trade. But what is now, according to Chinese jurisprudence, a “use in trade”? Is the production for the sole export purpose sufficient?

In the important Pretul-Judgment , the Supreme People’s Court (SPC), against lower court’s judgments, decided at the end of 2015 that a violation would only be accepted if the goods were offered on the Chinese market. This is not the case for exported goods. The underlying facts of the case are typical for the relationship between the OEM manufacturer and the foreign trademark owner: The infringed figurative mark was registered in China in 2003 for metal products and locks by the applicant, Focker. The Mexican company Truper was owner of the word mark “Pretul”, registered among others, in Mexico since 2002. Truper instructed Ya Huan (the defendant based in Pujiang / China) to produce locks, keys, instructions and packaging marked with the word “Pretul”. Both the instructions and the packaging contained the description in Spanish that Truper was the importer of the goods in Mexico and that the goods were manufactured in China. Neither the packaging nor the product instructions contained a reference to the defendant. Focker seized a number of these products through the Chinese customs in Ningbo, China, and filed a civil trademark infringement action against the defendant Ya Huan as a consignor. The SPC essentially concluded that courts were required to examine whether the mark applied for was used as a sign of origin on the Chinese market; only then it was necessary to check the risk of confusion. The SPC then pointed out that the mark at issue was not used as an indication of origin on the Chinese market since goods were intended exclusively for export.

Cases decided in line with the Pretul-Judgment may have two unpleasant side effects for the trade mark owner. If the mere export of goods does not constitute use of the trademark in China, the trademark registered in China may be subject to a successful invalidity request after three years on the ground of non-use. Furthermore, an opposition based on such a trademark may not be successful as the applicant can raise the non-use argument against the opposing trade mark or in a cancellation case.

Although the case had been decided by the highest Chinese court, the judgment is not binding for future cases pending before the SPC or even subordinate courts. Only a general judicial interpretation of the SPC would have a legally binding character. However, there are no indications that the SPC will elaborate and publish judicial interpretations in the near future on this subject. Therefore, conflicting decisions of the lower courts, with reference to the specific circumstances of this case in particular, continue to be delivered. One month after the Pretul-Judgment, the Higher People’s Court of Jiangsu has decided exactly the opposite way. According to the court, goods manufactured exclusively for export purposes could constitute a trade mark infringement, even if they were not sold in China. This involved an OEM production and export to Indonesia of diesel engines. The court noted the plaintiff’s well-known brand reputation in China and the fact that the OEM manufacturer should have known the infringed brand.

In a recent judgment of the Beijing IP Court, a foreign company commissioned its Chinese OEM manufacturer to produce and export “PEAK SEASON” garments. The Chinese brand owner of “PEAK” brought action. The Court of First Instance held that the garments, although intended for exportation, would also be available to Chinese consumers through Internet platforms such as Amazon. The infringing mark has therefore been used as an indication of origin also in China. In addition, the “PEAK” brand was very well known in foreign markets such as USA. According to the Court the OEM manufacturer should have known this.

It is clear from the existing case-law that the Chinese courts are trying to decide OEM cases on the basis of the concrete factual situation rather than following the Pretul-Judgment.

The ECJ’s Red Bull decision could also provide arguments for foreign trade mark owners to defend their rights. Red Bull, the manufacturer of the well-known energy drink, was the plaintiff of the proceedings. Defendant is a bottler company in Belgium (OEM manufacturer and defendant). Its client is a soft drink company located on the Virgin Islands. The client supplied the OEM manufacturer with the containers, partly labelled with similar brands with the corresponding capsules and extracts of the soft drink, and the specific preparation instructions. The OEM manufacturer provided only the filling services. Everything else, also the export, was done by its client. Red Bull sued the OEM manufacturer for omission and the case was submitted to the ECJ for a preliminary decision. It initially found that an omission could only be considered if the OEM manufacturer had used the similar mark in business. It was true that the defendant had a business which sought to profit. However, this was not sufficient for determining the use during trade. According to the ECJ, the defendant simply carried out a technical section of the process of producing the final product without having any interest in the external presentation of the cans, and in particular the signs attached thereto. Thus, it did not “use” those signs themselves within the meaning of Art. 5 Trade Marks Directive but merely provided the technical conditions for such use by a third party.

Various considerations are pertinent. On one hand, the Chinese case law is not yet solid enough to assume a clear legal position. A sale is certainly a “use” of the trademark. However, there are various business transactions that are closely related, be it preparatory actions (such as manufacturing, storage) or complementary actions (transport) which are not clearly assessed as use. On the other hand, and more importantly it is not clarified to what extent the trademark must be confronted with Chinese consumers or appear on the Chinese marketplace. Is the ability of Chinese consumers to be verified, and is it necessary to demonstrate in concrete terms that Chinese consumers were confronted with the goods? To what extent does the trademark have to have appeared on the Chinese market to conclude to a market disturbance or a likelihood of confusion? Future case law is expected to bring more clarity.

Another issue that is still open is to what extent the OEM manufacturer can be held responsible, if at all, to the obligation to omit and to seize. Not still clear is further whether the OEM manufacturer can also be sued for damages and, if necessary, to provide financially relevant information for a later claim of damages. Foreign companies interested in an OEM business model with China are required to take different precautions. Since unregistered trademarks without reputation are not protected in China, registration of the trademark is of utmost importance irrespectively whether the foreign company is interested in the Chinese market or not. The absence of a registered trademark in China and other factual (eg. former OEM manufacturers that appear as competitors) and legal (eg. lack of clarity in trademark legislation) circumstances can cause a perfect storm. The protection of IP rights in the contract with the OEM manufacturer is of course also important.

At the administrative level it is recommended - as a precautionary measure - to register the intellectual property rights in the Chinese General Administration of Customs (GAC) database. This qualifies for the ex officio protection system by which the GAC monitors products crossing the border and informs eventually owners of IP rights of suspicious goods. The local trademark management authorities, usually the Public Security Bureau (PSB) and the AIC, are also authorized to take action against OEM producers, shipping and storage companies, etc. The authorities will act upon request and after transfer of evidence but may also act ex officio. Finally, it should be noted that the courts in Zhejiang Province ignore the question of export in the definition of use and are therefore more willing to accept an infringement action, whereas the (not far away) Shanghai courts are likely to decide differently. The trade mark owner has means of determining the competent court.

Disclaimer: The opinion expressed in this article is exclusively the personal view of the author and binds in no way the employer entities.

Further Information

Günther Marten is Minister-Counsellor at the EU embassy in Beijing since Oct. 2016. He is in charge of developing institutional IP co-operation between EU and China and supporting European businesses. He joined EUIPO, Alicante/Spain, the managing agency for the EU trade mark and design system, in 1995 and held various significant positions. Previously he worked in the European Commission in Brussels as legal advisor.

Feature 5 - German Business in China

Results of the 2017/18 Business Confidence Survey
By GERMAN CHAMBER OF COMMERCE IN CHINA

German companies evaluate the current economic situation in China more positively than in 2016 and remain optimistic for the coming year. However, they are faced with a range of business challenges and have become more cautious regarding investments at new locations in China.

The German Chamber of Commerce in China conducted its annual Business Confidence Survey between 21st August and 29th September 2017 and collected 423 valid responses from its member companies. The representative sample allows for a comprehensive overview on developments and business sentiments of German companies in China.

German business in China covers a broad range of sectors. The two largest industries are machinery and automotive, making up 29.8% and 19.4%, while business services rank third at 12.8% of German companies in China. The majority is concentrated in the main economic clusters of the Yangtze Delta, the Bohai Economic Rim in the North and the Pearl River Delta, with a smaller number of companies in the Southwest and other regions. More than 70% are registered as WFOEs and the majority are small and medium sized enterprises: More than two thirds have an annual turnover of under RMB 250 million and more than 70% have less than 250 employees at their local operation.

Economic and Business Outlook

German companies’ economic outlook has recovered from the low forecasted in 2016. As the largest German industry in China, machinery/industrial equipment especially evaluate 2017 as positive for the own industry and significantly better than last year. This is in line with a positive development of China’s machinery industry in the current year and with a steep rise of German machinery exports to China in 2017. Automotive and business services retained last year’s level, with optimism for 2018.

Nearly two thirds of German companies in China expect to exceed or achieve their business targets in the current year. 75% of the companies expect their turnover to increase in 2018. However, companies remain cautious regarding investment and employment.

Business Challenges

Two thirds of the respondents struggle with slow cross-border internet speed and internet access restrictions – a significant increase compared to previous years. German companies also report a great deal of uncertainty regarding the new Cybersecurity Law: one in three companies is unsure about the impact on their business activities in China. Before taking effect on 1st June 2017, the law was widely anticipated among German companies along with concerns about possible implications for business activities.

The shortage of qualified staff and increasing labor costs continue to be the main challenges for most German companies operating in China. Regarding the employment of non-Chinese nationals, the roll-out of a new nationwide work visa and working permit policy has made things more difficult for a third of companies, but the majority has not been negatively affected.

Domestic competition ranks 6th among the business challenges which is underlined by the increasing innovation capacity of Chinese companies. More than 40% of respondents expect Chinese competitors to become innovation leaders within five years. For the first time, this share is higher than the share of respondents who think this scenario is unlikely.

Preferential treatment of local companies, IPR issues, administrative hurdles and legal uncertainty also rank among the Top 10 business challenges of German companies. Nearly half of German companies have encountered legal or regulatory obstacles in the past year, with custom issues most prominent.

Reforms and Policies

The economic reforms of the last years tend to be welcomed by German companies. However, the initial enthusiasm about the reforms in the wake of the Third Plenum in 2013 has faded. Looking back over the past three years, German companies evaluate the reform impact much less positively than in the early days. Of the more recent policies, nearly 40% of German companies attest a negative impact to the restriction of capital flows.

Bilateral relations play an important role for German companies in China: 58% of respondents find bilateral relations between Germany and China very relevant or extremely relevant for their future business. More than half consider market access and a level playing field for foreign business in China urgent for the newly formed German government to act upon.

Investment Prospects

A quarter of German companies in China plan to invest at new locations within the next two years, with Jiangsu, Guangdong and Sichuan/Chongqing being the most frequently named locations. However, the share of those not planning investment at new locations has reached more than half.

The main source of financing are reinvestments of earnings from the Chinese market. Of new investments in 2018, more than half will be in new manufacturing facilities as well as in staff development and training. While market growth expectations and strategic business considerations are key reasons to not invest, one in four companies name regulatory reasons for not increasing investment.

More than half of German companies have little or no confidence regarding the further opening of China’s market, while over 40% feel optimistic about the opening in the medium term. The State Council’s Document No. 5 which was published in January 2017 is not very well-known given that it is one of the major recent documents introducing reform measures to further promote foreign investment. In August 2017, the State Council’s Document No. 39 introduced further measures to facilitate foreign investment.

Research and Development

More than 40% of respondents conduct R&D in China. A focus on German R&D as well as concerns regarding intellectual property and technology transfers are the key reasons to stay away for those who do not engage in R&D in China, but in other countries.

However, China has stepped up as a location for R&D over the last few years with lower shares of companies stating a lack of local technical expertise and an unfavorable research environment as reasons to not engage in China.

Belt and Road Initiative

An extra part to this year’s survey contains an assessment of German companies’ views of and engagement in the Belt and Road Initiative (BRI), along with a closer look at projects as well as benefits and challenges.

More than one third see a positive effect of BRI on their future business, while more than half of respondents report no significant effect or no opinion about BRI. 30% of German companies are active in or consider engaging in BRI projects. For those who are not, a low relevance to their own industry or business model is the most frequently stated reason to not engage, followed by a lack of suitable projects and insufficient information. German companies’ involvement in BRI covers a broad range of areas, with automotive, construction and logistics together accounting for more than 50%. Nearly half of those who are active or consider engaging in BRI, are already implementing or planning concrete projects.

Further Information

For further questions please contact:
Jana Kumpf
, Deputy Chamber Manager
German Chamber of Commerce in China – North China
kumpf.jana(at)bj.china.ahk.de

The full report is available for download from our website www.china.ahk.de.

More Than Business - Sustainable Return on Investment (SROI)

A Tool for Emerging Economies?
By TARA MERK AND PHILIPP KRUSCHEL

In the 21st century, running a successful business is not always easy. The competitors are plenty and profit margins are growing slim. Moreover, with unstable regimes, the looming threat of climate change and drastically increasing inequality, the playing field on which multinational enterprises operate today has become significantly more complex – or at least, this is what it seems.

A group of leading businesses has begun to see the matter from a radically different point of view. Instead of focusing solely on the return on investment (ROI) generated through simple labor, machine or advertising investments, they are turning the international risk factors listed above into viable business opportunities. By investing into environmental and social sustainability, they are cutting costs, increasing productivity, consolidating brand identity and ultimately enhancing shareholder value.

Freya Williams, author of “Green Giants”, conducted a study of nine world leading billion-dollar brands including Tesla, Whole Foods and IKEA which found that each of these companies generated an extra USD 1 billion annually by means of products which have underlying social or environmental sustainability considerations. Studies concluded by the Morgan Stanley Institute for Sustainable Investing, the Harvard Business School and Thompson Reuthers have come to similar conclusions, overall showing that companies who invested sustainably generally performed better than their competitors.

Of course, from a societal and environmental point of view, this development holds great potential. The United Nation predicts that by 2050 almost ten billion people will be living on our planet, using ever more resources and thus putting societies and our planet under increasing strain. Especially in China, one of the worlds’ fastest growing economies more and more people require access to decent jobs, good education, affordable energy and other highquality goods and services. Having businesses help to cater to these needs is consequently not only an optimal solution to generate profit but also to serve the environment and society, especially in emerging markets such as China.

Thus, the question and challenge at hand is not if businesses should take sustainability into consideration when making their investment decisions, but how.

Project Approach

Building on society’s need as well as the different ways in which businesses are incorporating sustainability into their everyday decision making, the Emerging Market Multinationals (EMM) Network for Sustainability together with its partners has been designing and piloting a sustainable ROI (SROI) methodology – a decision making framework for the future of business.

The EMM Network for Sustainability is part of the Emerging Market Sustainability Dialogues (EMSD) implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ). As a federally owned enterprise, GIZ supports the German Government in achieving its objectives in the field of international cooperation for sustainable development worldwide. The EMM Network comprises more than 350 sustainability leaders in multinational companies based or operating in emerging economies such as China, India and Brazil. The Network seeks to capture, advance and multiply the scalingup and rolling out of sustainable business solutions, especially in emerging markets. This is done under the umbrella of EMSD, which also encompasses the Economic Policy Forum (EPF) and the Emerging Market Dialogues on Finance, to ensure that sustainability solutions are implemented, incorporating not only the business world but also stakeholders in policy making and the financial sector.

To create this new decision-making framework, the EMM Network and its partners have been reassembling the most valuable insights from both classical and innovative practices.

Traditionally, businesses evaluate financial returns when making investment decisions for their companies. Financial statements have the advantage of giving a clear quantified indication of whether a certain investment will pay off for a company or not. Considering the changing environment in which businesses are operating however, there is increasing pressure to include social and environmental factors and other externalities into investment decisions. Doing this transforms traditional return on investment methodology into the comprehensive sustainable return on investment approach. As SROI also includes nonquantifiable benefits such as positive environmental effects, transparency and certainty in project planning, the methodology establishes an alternative skill set for measuring the relative success of business maneuvers.

Having identified these insights, and reassembled them into a new framework, the EMM Network has been working to engage with companies to not only incorporate their opinions on the approach but also to pilot the SROI methodology in form of several case studies. This ultimately serves to highlight the connection between sustainable activities and successful business cases and will help to scale the project both vertically and horizontally in the long run. Furthermore, during and after piloting the methodology, it is ensured, that participating companies are not only supported by the EMM Network but also in form of peer learning during several exchange events throughout the process.

Value Added

After eight large multinational companies including Adidas, Siemens and Odebrecht implemented the first trial of testing the SROI methodology in Brazil for nine months, first valuable insights into the benefits of taking a more holistic and sustainability oriented stance towards making business decisions were made. Following this pilot in Brazil, a group of companies, together with Syntao in China and with Instituto Ethos in Mexico started to engage in SROI quantification as well. Concrete actions taken by the businesses included establishing projects for community capacity building and volunteering of employees, stakeholder engagement activities and improving eco-efficiency.

Overall, the companies reported, that after integrating the SROI Methodology into their internal cost-benefit analyses they began to better understand, how sustainability concerns and the financial area relate. Furthermore, they generally reported a greater awareness for sustainability issues as being an integral part of business operations. Lastly, of course companies responded very positively to the fact that they were effectively cutting costs and that integrating sustainability concerns into their business decisions, allowed them to feel better prepared for ever-changing sustainability regulations and standards. A summary of the findings from the cases and further information is available at www.emm-network.org.

Lessons Learned

First insights from the project include that integrating sustainability aspects into investment decision making can be beneficial to stake- and shareholders alike and aid the strategic decision-making process in large multinational companies. Quantitative frameworks focusing solely on monetary profits still define the status quo and often hinder decision makers from adopting a more holistic and long term oriented stance. However, the project has so far clearly confirmed, that bridging the world of finance and the sustainability ecosystem can bring both qualitative and quantitative benefits to all parties involved. A key insight gained from the process was, that to induce conductive synergies, the SROI methodology needs to be very clearly defined and offer rigorous guidance on how and when to quantify externalities. Furthermore, for companies to integrate sustainability concerns into their core business, various calculation cycles are needed, and peer learning should explicitly be supported.

 

Ideas for the Future

The EMM Network will continue to help foster the development of a unique tool which will help businesses include sustainability considerations into their strategic investment decisions. This tool will be developed for all emerging markets with further piloting and development being led in Mexico, Brazil and China. Secondly, the EMM Network as well as its umbrella organization, the EMSD, will continue their efforts to feed the lessons learned from the SROI methodology implementation into global policy processes such as the G20, BRICS and Agenda 2013

Further Information

Philipp Kruschel is the Deputy Director of the Emerging Market Sustainability Dialogues Programme and serves as the Director of the Emerging Market Multinationals Network for Sustainability. Previously he worked at various UN Organisations, the World Bank and in German Federal Ministries. He holds advanced degrees in economics and international relations from Tufts University and from Free University Berlin.

Tara Merk is a project assistant at the Emerging Market Sustainability Dialogues (EMSD). Before joining EMSD, Tara gained experience at a strategic politics consultancy as well as within the social start-up sector. Prior to this Tara enjoyed a Liberal Arts education in Maastricht (the Netherlands) and Hong Kong, where she focused on economics and development.

05 | 2017 | MADE IN CHINA

Foreword and full PDF

The development of the Chinese start-up scene shows substantial progress. Based on research done by UHY, a network of independent accounting and consulting firms, the number of new businesses in China between 2010 and 2014 has grown by nearly 100% to 1.61 million start-ups. This makes China the new leader in overall growth numbers, surpassing Western countries. Furthermore, according to KPMG’s Venture Pulse Report, in 2016, venture capital in China reached USD 31 billion. Therefore, China became the second biggest venture capital market in the world. Many different factors have led to this steady and fast-paced rise of the Chinese start-up industry. This includes a wellconnected investor network, co-working spaces, presence in the media, accelerator programs, and the general acceptance of the Chinese consumers to adapt new products, services and technologies very quickly.

In this issue of the German Chamber Ticker, we will offer insights on the current development of the booming start-up scene in China and take a closer look on the reasons for the fast globalization of the industry. This edition will also include advice for foreign companies interested in acquiring Chinese start-ups as well as suggestions for Chinese start-ups to expand globally. Furthermore, we will provide you with interesting insights on China’s e-commerce market and the unique characteristics of Chinese companies and their global expansion.

Download the Full PDF here

Cover Story 1 - Designed in China

The Rise of Chinese Innovation
by SEBASTIAN MUELLER

For many, China is still synonymous with the copying or stealing of ideas and the production of low cost alternatives. Those living in the country or following it closely know this to be an outdated view. "Made in China" used to mean cheap labor, cheap production, and bad quality. Chinese clones of Western innovation used to be infamous all over the world. Those days are starting to seem like a distant memory.

With the creation of a large middle class with disposable income and desires, it has long moved on to the "Made for China" era. For a majority of MNCs, China is one of the biggest markets and one of great importance. In order to win a bigger share of Chinese consumer’s wallets, local tastes and preferences are being taken into serious consideration. From F&B, to fashion, electronics, and even automobiles, "Made for China" is a reality today, as consumption in the country remains steadily on the rise.

Following the shift from being the world's workbench to becoming one of the world's most important economies, the next change is on the horizon. As China and its companies continue to look for growth, their gaze is landing on global markets, where some of China's most valuable companies (Alibaba, Tencent, etc.) are making their presence known. But, these companies have yet to prove their ability to compete with the incumbents. The next big shift will be dubbed "Designed in China".

Why Adoption Rates Matter

To understand how local companies made the shift from copying to innovating, one needs to look no further than WeChat. Having started its existence as a crossover of QQ, WhatsApp, and similar existing products, many deemed it a copycat. But, fast release cycles and a willingness to solicit, listen, and react to market response has turned WeChat into Tencent's arguably most valuable property. It has been adopted so widely and is used so frequently by its community that Western companies are watching in awe and are looking to learn from and copy it.

Success stories like WeChat are possible in China because of the general willingness, across generations, social groups, and geographies to adopt new technologies quickly. With China's incredible rise over the past decades, life has looked completely different for hundreds of millions of people year after year. Change has been ever-present; in lifestyle, affluence, infrastructure, and opportunity, amongst other related fields. Continuous change and adaptation to new circumstances is the norm for Chinese citizens, a factor that has been crucial to driving their rapid adoption of new technologies.

As a rule of thumb in China: If there is potential benefit, a chance for gain, and if it is interesting, people will give it a try without hesitation, regardless of how small it might be. They will also immediately abandon the product in the case that it does not satisfy them. Within such a fast-response liveor-die framework, Chinese products evolve and adapt to the market more quickly than in other markets. Hence innovation, both incremental and disruptive, has the right breeding grounds to accelerate at unprecedented levels.

In many Western countries, the standard of living is high and fairly stable. Everything newis first doubted, inspected, and undergoes long cycles of consideration. Market response and adoption is slow, and hence the ability for a company to iterate on market feedback is hampered. Within the frames of such an economic environment, and after copying and catching up to global standards, it is easy to see why China's companies are in the pole position for creating the next big wave of innovation. And they are already doing it, yet much of their progress has remained invisible to outsiders until now.

Designed in China

For veteran foreign professionals living in China, the degree of innovation becomes most apparent when contrasted with one's own country during a visit home. Where most would have considered without a doubt that their home countries were more advanced than China ten years ago, this is no longer the case. From ubiquitous mobile payments through WeChat, very affordable high-quality mobile devices from Xiaomi, to well-designed electric scooters from Niu; China is living in the future.

In addition to the millions of merchants and shoppers in China that are seeing their everyday lives continuously shaped and changed by Alibaba, one can see the enormous ways in which social technology giants are connecting people through text, voice, video, and live stream. These factors, together with the impeding eMobility revolution that is being pushed forward by a plethora of new local entrants and government policy, will most likely make China the global frontrunner in the space.

The products that Chinese innovators are creating are no longer like the ones people used to scoff at a decade ago. No more bannerladen, unusable web applications. No more clunky, ugly electronics. No one-on-one knockoffs. The new products being created in China today are rife with ingenious features, pleasant user experiences and strong value propositions. Design is becoming an important consideration in Chinese fashion, hardware and software; all catered to global modern tastes.

Conquering the World

There are still many hurdles for Chinese companies in global markets. The lingering negative perception of Chinese companies as copycats is surely still one of those. Yet, there are other factors that pose greater challenges. Among them is their general understanding of other markets, or the lack thereof. Many of their first moves in entering new markets have made it quite apparent that their traditional approaches are not working extremely well. The playbooks that were created, tried, and executed many times over are good for conquering a large unified market with 1.3 billion people, but seem to fail when applied to more fragmented geographies outside of China.

Companies looking to enter Southeast Asia, which is geographically and culturally the lowest-hanging fruit, are looking at a market size of about 640 million people in 11 countries. Every country has its own rules, system, agendas, language and local players. Every country is fundamentally different, yet rather small as a single market when compared to China. Similar situations exist in Europe, the Middle-East, Africa and South America. When being used to dominating a large unified market, these fragmented small markets, as high-value as they may be, are difficult to conquer.

On the surface, the strongest progress has been made by Alibaba, using a mixed strategy of acquisitions, building new local properties and pushing its underlying platforms. In Southeast Asia alone, it has acquired popular portals such as e-commerce company Lazada (and indirectly Singaporean online supermarket RedMart), while building an international version of Taobao. It is further pushing Alipay, its payments business, and Cainiao, its logistics platform into Southeast Asian markets so that everything can run on the existing infrastructure they have created in China.

On the other hand, WeChat continues to struggle with global adoption. While being used mostly by the Chinese diaspora in overseas markets, attempts have been made to promote the product using star power (e.g. Messi or Neymar). Those tactics have largely failed so far. International expansion efforts are now focused on offering the app as a convenient tool for Chinese tourists, rather than on acquiring foreign users. Another cautionary tale involves the US launch of consumer electronics company LeEco, which ended rather disastrously. In trying to use the same playbook they used in China, LeEco tried to launch its smartphones via flash sales, a tactic which is widely accepted in China, but unpopular in Western markets. The new entrant bore the brunt of consumer skepticism, the flash sale did not pan out, and LeEco failed to capture any significant market share using the tried-and-true methods it learned in China.

Cooperate and Prosper

Learning from its past failures, Chinese companies are getting smarter about their international strategies. This is a fact underlined by companies like Indiegogo, whose main business today in China is Chinese companies seeking crowdfunding in Western markets, in order to gauge demand and gather quick feedback on their ideas and offerings. Just as Western companies had to fail and iterate to finally see success in the Chinese market, Chinese companies are now going through the same struggle. Products cannot be simply exported, they need to be designed for their respective target markets. Herein lies the next big opportunity for Western companies to engage with the continuing Chinese expansion. While many feel the Chinese market saturating for their products and services, the next wave will be to help Chinese companies succeed globally.

For those based in China, this means that you need to be a partner or guide to these companies’ international expansion. This includes helping to shape products that will gain acceptance in their home market, helping to make the right connections and helping to put winning strategies in place. Foreign agencies and consultancies are in prime positions to take over this business, while their traditional market share and hold on MNCs is quickly eroding in the face of local competition. For those based in Chinese companies’ desired target markets, that means opening channels and helping them to place their products in the hands of the consumers. Big retail chains, online retailers, and other players can anticipate a new wave of supply that, if certain exclusivity is retained, could push them far ahead in the stalling battle for market share over static markets.

In closing, it is fair to say that companies are just at the cusp of what will be the next big wave of growth for China and its companies. After having been a manufacturing hub, followed by its evolution into a consumer society, Chinese companies are now out-innovating their Western counterparts and are pushing into other markets quickly. Large opportunities are available to those who can be a good partner and seize the reins at the seat of this seismic shift

Further information

Sebastian Mueller is the Chief Operating Officer at MING Labs, a digital user experience and innovation company. For more information, please visit http:// www.minglabs.com or contact Mr. Mueller directly at sebastian.mueller(at)minglabs.com.

Cover Story 2 - Starting Up

Startup Culture and Innovation in China
by JIAWEI ZHAO 

Business forecasters had been waiting for this for quite some time and it finally happened in 2016: For the first time China is the country with the largest number of startups, edging out the United Kingdom and the United States. The latest research by London Consulting shows that there are more than 1.61 million startups in China. That means that there was an estimated 100% year-on-year growth since 2010. In 2016 alone, over 20 billion dollars in Venture Capital funds were injected into sectors such as Fintech, Virtual Reality, Robotics, Artificial Intelligence or Autonomous driving. Moreover, China came in fifth in the global startup environment survey. 85% of Chinese respondents expressed a strong interest in setting up their own companies according to an entrepreneurial attitude survey by UHY international which covers nearly 50,000 citizens in 44 countries.

A recent analysis conducted by the management consultancy Porsche Consulting China identified four factors that are driving the virtuous cycle of success in China’s startup community:

Vast and diverse talent pool

Between 1978 and 2015 more than 4 million Chinese citizens completed their studies overseas (Chinese student studying abroad report 2016). In the next five years, an ‘inflection point’ will emerge when Chinese students returning to China will outnumber those going abroad. This is a boom to startups in China, given that many of these talents have solid backgrounds in Research and Development with high-tech companies. A few stellar examples are Mr. Yanhong Li, who brought search engine technology back to China and established Baidu; Mr. Xing Wang, CEO of a group-buying platforms Meituan.com and Dianping.com; Ms. Qing Liu, CEO of the mobility sharing company Didi and Mr. Ou Chen, founder and CEO of the e-commerce company Jumei.com.

Extremely supportive national and local regulations

To realize its call for “mass entrepreneurship and innovation”, the Chinese government has laid out a series of favorable policies to encourage participation with holistic infrastructure to facilitate innovation. For example, rentals, broadband access fees, and the use of public software for makerspace and other innovation incubators are partially subsidized. As a result, many low-cost, fully-equipped, open-concept co-working spaces rapidly sprung up across the country. Furthermore, public classes taught by mentors to share experiences and funds to support campus entrepreneurship have been made readily available. According to the NDRC (National Development and Reform Commission), registered student entrepreneurs reached the number of 615,000 in 2016. And these students are transitioning their idea lab cases into full-fledged startups as they step out of campuses.

Sheer scale and ‘forgiving’ nature

Chinese consumers are willing to try new things, while accepting that quality may not be ‘first time right’ for many of these new products. For example, a World Economic Forum report shows that 75% of Chinese correspondents are willing to try a self-driving car, compared to just 56% globally. This ‘daring and forgiving’ Chinese consumer behavior is transformational: It allows startups to deploy products earlier and get data back faster on what customers want. This helps them to improve on their product design and market positioning. Moreover, this allows startups to start generating revenue faster. The sheer size of Chinese market also bodes well for startups who need the scale effect to be successful.

Entrepreneurs as ‘national heroes’

Lastly, media in China are providing a significant amount of positive coverage to the startup culture and entrepreneurs, elevating some of them to “rock star” status. They are portrayed as brave, innovative, brilliant, and mission-driven.

This not only raises awareness and admiration for entrepreneurs, but also inspires a whole new generation to be part of this startup culture.

Suggestions to Chinese startups

In order to succeed in the China startup environment, entrepreneurs should take the following information into consideration: They should work with the fact that Chinese consumers are ‘daring and forgiving’. This enable the companies deploy products early to get market feedback on the product’s adoption rate, test sales strategy effectiveness and supply chain robustness. If a small-scale product test turns out to be unsatisfactory, one can use the market data to quickly improve its competitiveness. Conversely, although a positive test result may not guarantee a runaway success upon a full-scale launch, test selling is needed to verify the robustness of the sales channel, supply chain, as well as validating business case projections and assumptions. Internally, startups need to walk a fine-line between avoiding ‘group thinking’ and ‘whatever the CEO-says’, ensuring decisions are still being made while accommodating ideas coming from a diverse group of talents. Ensuring that the company gets the best ideas out of a ‘team of rivals’ is vital for a startup to challenge status quo and move up the innovation curve. It is only through deliberate talent and workplace culture management that this balance could be achieved.

Advice for companies interested in acquiring startups

Investors should pick companies that observe Moore’s Law; especially for some startups which may not have cost advantages in the beginning. If the startups’ businesses are part of an ecosystem with intense competitions that advances the core technologies with wide scale production, this would quickly push down the cost to a breakeven point – and eventually lead to profitability. Examples are cloud computing – with a steady stream of subscription fees, any benefit of decline in storage costs falls straight down to gross margin. Another example is robotics where the core function is LIDAR (laser radar): if the projected 100 times cost reduction of LIDAR from above 100K US$ is realized over the next five years, this would mean 50-75% reduction in the unit cost of a robot.

Furthermore, given the rapid diversification of technologies coupled with acceleration of the technology adoption life cycle (‘S-Curve’), these evolutions require companies to capture transient, rather than sustainable, competitive advantage. Therefore, both investors as well as startups need to exploit short-lived opportunities with speed and decisiveness, especially in reconfiguring the business strategy and disengaging swiftly with diminishing opportunities. The key is to have the discipline and nimbleness to get on the winning path by jumping on a succession of new waves.

Pitfalls to avoid post-M&A

Enabled by Internet of Things, the pace of product diversification and technology advancements is ever accelerating; and the ‘new normal’ of customer engagement is marked by increasingly individualized solutions that require flexible production. In other words, a ‘lot size of 1’ is needed. These market forces require startups to have the agility and flexibility to maneuver, or in extreme cases, to pivot, their corporate strategies, product designs and operational models in response to these changes. Furthermore, their organizational structures need to be relatively flat to enable timely decisionmaking. Therefore, any post-M&A (Mergers & Acquisitions) management should be weary of imposing any process or organizational changes that could jeopardize the agility of the startups. Rather, the focus should be on leveraging scale advantage and other operational synergies to benefit the startups’ cost structure and operational efficiencies.any process or organizational changes that could jeopardize the agility of the start-ups. Rather, the focus should be on leveraging scale advantage and other operational synergies to benefit the startups’ cost structure and operational efficiencies.

Further Information

Jiawei Zhao is Managing Director of Porsche Consulting, China. He has decades of experience working with startups in Silicon Valley, India, China, and ASEAN countries in various capacities, including as founder, team member, consultant, as well as investor. He can be contacted at jiawei.zhao(at)porsche.cn.

Cover Story 3 - Fast, Innovative, and Globally Connected

Internationalization of the Chinese Start-up Industry
by MAREN PETRY

The development of the Chinese start-up scene is just a recent progression in the last decade. The industry encapsulating young entrepreneurs and their innovative ideas is still in the phase of establishing itself in comparison to advanced start-up hubs globally. Nevertheless, it is a fast-paced and very efficient journey to a competitive and advanced stage, demonstrated among others with the fact that China has, with USD 31 billion in 2016, the second largest venture capital market in the world. This process started to be acknowledged about five to seven years ago and incorporates all the factors which professionally support and foster a flourishing innovative industry for start-ups. This includes a well-connected mentor and investor network, co-working spaces, accelerator programs and incubators, presence in the media, and in the case of China, also an official backing from the government.

As rapid as the industry developed itself, the process of internationalization is taking place, more noticeably in the last couple of years. This development incorporates different factors like foreign, experienced venture capitalists increasingly seek investment opportunities in Chinese start-ups. The number of foreign entrepreneurs who found their own businesses in China or tap into the market as one of their first international expansion moves is rising. Additionally, exchange programs between Chinese and international start-ups are established. All these aspects, as well as the fact that successful Chinese unicorns are conquering international markets emphasize that the start-up industry in China is not just a national development, but a cosmopolitan and interconnected progress. Furthermore, the startup scene in the biggest consumer market receives increasing attention from international media, politics and from the entrepreneurial side, including famous start-up hubs from all over the world. The “Silicon Valley” of China has been established, even though sources claim this title to Beijing, Shanghai, Shenzhen as well as Hangzhou as the most promising start-up locations. In short, the Chinese start-up scene was born, grew up quickly, and is now connecting with its broader environment as well as exploring the world.

Paths of internationalization

The different concepts that are fostering a more internationally connected start-up scene in China have various reasons doing so. Many programs emerge with the goal to make the Chinese start-up scene more international as well as globally competitive, especially from Chinese perspective; others, especially foreign entrepreneurs see the huge consumer market or seek potentials within specific industries and aim towards getting a piece of the cake.

One of the first programs supporting the internationalization of the Chinese start-up scene from the Chinese side is the government sponsored Overseas Talent Entrepreneurship Conference (OTEC). OTEC is a program from the local government of the Chaoyang district, Beijing’s largest inner-city district. OTEC has two main goals: one is to attract Chinese oversees graduates and their knowledge gained at top universities in the States, Europe or elsewhere to come back to China and establish their own company. With this international mindset and experience they are a welcome asset to further develop the innovative hubs in China. The second ambition is to support and even partly fund foreigners, who strive to establish a new business in the Chaoyang district. They organize internationally-held start-up contests and invite the winners to China and partially even sponsor the costs for setting up a new business in China as well as connecting foreign start-ups to Chinese investors. Additionally, the people behind this government organization host events targeting the international start-up community, offering exchange and explaining the still quite tricky visa regulations for young foreign entrepreneurs in China. The result of just five years since OTEC was established, there are 4,000 start-ups with foreign or overseas returnee founders, which have been established in Beijing’s Chaoyang district and 400 start-ups which have been fully or partly funded. These numbers underline the demand of such a service and the progressing internationalization of the Chinese start-up scene.

An exchange project supporting and connecting German and Chinese high-tech start-up entrepreneurs is TIE² International Lab (TUM Tsinghua International Innovation Entrepreneurship Exchange). This program is a cooperation between UnternehmerTUM, the Center for Innovation and Business Creation at the Technical University of Munich and X-Lab connected to the Tsinghua University in Beijing, two of the leading entrepreneurship centers in Germany and China. In a selection process, both entities choose up to ten start-ups that focus on smart city solutions. These teams go on a one-week trip to the partnering country, work in tandem with entrepreneurs to even further advance their business concept as well as understand and explore the potential of the foreign market.

Furthermore, they take advantage of the possibilities of globalization for their own enterprises through workshops, events and specific visits in the respective countries. The initial idea of the exchange project was to support the promising high-tech start-ups in their foreign market entry efforts through joint projects and to establish and international innovation network. The first exchange took place in 2016. This year, the visit of Chinese start-ups in Munich took place in July and the entrepreneurs from Germany visited Beijing in mid-September. The program for 2018 is already in preparation due to its great success.

An example of a Chinese start-up growing tremendously fast with an aggressive global expansion plan and spreading innovative concepts from China to the world is Mobike, the bike sharing start-up which has spread across 100 cities in China. In just two years, the colorful Mobikes are present and are used publicly for daily commutes. The company began to expand globally at the beginning of 2017 and expanded into Singapore in March and into Sapporo, Japan in August. As for Europe, Mobike made its debut in Manchester and Salford in June, and Milan and Florence at the end of July. According to the company, Mobike is aiming for 200 cities globally by 2018. Shared bikes with fixed docking stations have existed globally for quite a while. But the system of Mobike and several other Chinese shared bike companies, where the bikes can be placed nearly anywhere, is getting so famous and successful, that this concept is even been copied abroad by foreign companies.

A further example of Chinese start-up industry internationalization is the American co-working space provider WeWork, headquartered in New York. In its rapid expansion into China, just in July of 2017, the company announced that it will invest about USD 500 Million in the Chinese market and found the independent entity WeWork China. At its current state, WeWork runs eight locations in Greater China, including co-working spaces in Beijing, Shanghai as well as Hong Kong. Several national and international experts see a lack of quality in Chinese accelerators, incubator, co-working spaces, and the surrounding programs and services offered. Therefore, the demand for internationally successful programs to further develop Chinese start-up professionalism through their global network’s easy access to foreign markets is apparent.

In this regard, both sides can learn from each other: Chinese programs fostering the development of start-ups learn about advanced mentorship programs, sustainable management, growing strategies, as well as change management. Introducing prototypes and improving them based on detailed customer feedback is the standard approach of Chinese start-ups, while this lean management style is still more of a trend abroad. Therefore, there are advantages of international coworking spaces, accelerators etc. entering the Chinese market on both sides.

Re-thinking “Made in China”

The fact that China plays a significant role in the world economy today is evident. Innovative companies, new concepts from the field of shared economy and modern technology that are “Made in China” are still in an early stage, but have a strong potential for sustainable and wide-ranging acknowledgement and success. At this point, the start-up scene in China is still slightly underestimated, but even large Fortune 500 companies, like German car manufacturers consider the innovative hubs of China, evaluate the innovation level, and seek cooperation with young Chinese entrepreneurs with ideas, products and services. Additionally, many other stakeholders, as outlined above, have recognized the possibilities that lie within the Chinese start-up scene as a supplier for innovation and a market for fostering environments such as accelerators and co-working spaces. In the most recent steps of the internationalization of the Chinese start-up scene, Chinese unicorns and other successful start-ups are reaching for more than just the Chinese market, by expanding globally. With steps of development and acceptance of these concepts, it seems to be that a “re-thinking” and more positive connotation of “Made in China” has taken place.

Further Information

Maren Petry is Senior Manager at the German Industry & Commerce Greater China Beijing (GIC Beijing). She supports German companies entering the Chinese market and leverages her experience and contacts to support cooperation between Chinese and German start-ups. Before working for GIC, from 2015, Maren worked for a German start-up and has built up a vast network within the German and Chinese start-up scene. Maren sees the potential which lies in the development of the Chinese start-up industry. She can be reached at petry.maren@bj.china.ahk.de.

Cover Story 4 - The China Opportunity

Selling to the Discerning Chinese Middle-Class
by KARL WEHNER

 

Companies often have just one chance to enter a market. To succeed on the vast Chinese market, it is important to understand the Chinese retail landscape as it differs in many respects from that of the West. China’s place in the world economy has been on the rise since 1978, when the country was opened to foreign investment. That year, China’s total imports and exports of USD 20.6 billion ranked 32nd among all nations and accounted for less than one per cent of the global trade. Fast forward to today and China has surged ahead, accounting for 16.32 percent of world GDP, with only the USA ahead and with Germany ranking forth.

Increased purchasing power

This, coupled with the fact that Chinese consumers purchased 172 percent more than US consumers in 2015 in terms of value (USD 589.61 billion vs USD 247 billion), shows that Chinese spending is well and truly outperforming the West. It’s no wonder that foreign brands are flocking to the market and wanting to reach China’s 1.35 billion consumers. And whilst spending is on the rise, the shape of that spending is changing rapidly. Income of the Chinese population is increasing at a faster rate than inflation and goods and services prices. This means Chinese consumers have more disposable income than ever before. China has 6.9 percent GDP per capita growth rate, compared to 0.7 percent in Germany. This is coupled with the fact that China’s consumer class is large and growing - with some experts predicting it to reach 854 million people by 2030.

A demanding and growing consumer base

These impressive figures are due to the growing Chinese middle-class consumer base, as increasingly, consumers are hungry for foreign products and brands. Foreign brands are often perceived to be of superior quality and represent luxury for the Chinese middleclass. A recent report by McKinsey suggested that Chinese consumers are becoming more selective in how they spend their money, choosing premium over mass products. The demand for high-quality foreign brands is stronger than ever, evidenced by Alibaba’s sales during its 2016 shopping festival Singles’ Day, during which a third (37 percent) of items purchased were from international brands. U.S. brands followed by European brands were the beneficiaries. Quality has become more important than ever before, and Chinese consumers are increasingly likely to spend more on a product if it is foreign, as they feel it guarantees a level of quality they might not be able to find in domestic brands.

 

The world’s largest e-commerce market

China now has one of the largest and most prosperous retail markets in the world. The country’s retail sales are predicted to reach about RMB 48 trillion ( USD 6.99 trillion) by 2020, growing at ten percent a year, whilst e-commerce trade is projected to grow at about 15 percent in the same period. In 2015, Germany’s total retail sales of EUR 471.5 billion were just 12 percent of China’s RMB 30.1 trillion (EUR 3.83 trillion).

Online shopping festivals – a particular Chinese experience

Adding to this opportunity is something which is unique to the Chinese retail market – the popularity of shopping festivals. These online events now form a vital part of China’s retail identity and are huge calendar events which many Chinese online shopping enthusiasts look forward to. They play an integral role in encouraging consumers to experience new products and brands, especially those from overseas, as well as providing businesses with a platform to increase brand exposure and trade.

The best example of one such shopping event is Alibaba’s 11.11 Global Shopping Festival, which is now bigger than Black Friday and Cyber Monday combined. The festival originated from the Chinese folk holiday ‘Singles’ Day’, which falls each year on 11th November and was first celebrated at Chinese universities in 1993. This date was adopted by Alibaba in 2009 as a way to invite people to buy themselves gifts in the spirit of an “Anti-Valentine’s” Day. It has since evolved into the biggest 24-hour online shopping festival in the world, breaking sales records each year since it began. At the 2016 festival, transactions worth RMB 120.7 billion (USD 17.8 billion) were processed, representing a growth of over 30 percent compared to 2015. At peak periods, staggering 120,000 transactions were processed per second.

Gateway to China

Setting up operations in China can be very challenging and is not without its risks. As a result, many of Western brands use platforms such as Alibaba’s Tmall Global, which gives them access to the 466 million annual active consumers on Alibaba’s platforms without the need for a physical presence in the country. Tmall Global currently hosts more than 7,700 brands from 53 countries and is used by a growing number of brands from the UK, US, Germany, Australia, New Zealand, South Korea, Japan, Taiwan and Hong Kong as a spring board to China. The opportunity is huge and one that Western businesses ignore at their own peril. Entering this market takes commitment but with perseverance, as many companies are seeing, it can more than pay off and deliver success to brands in an ever-evolving market.

Further Information

Karl Wehner is Managing Director of Alibaba Germany. He is responsible for driving partnerships in Germany, Austria, Switzerland, Eastern Europe and Turkey. Karl has over 15 years of experience in e-commerce and sales, having started his career in e-commerce at Amazon Germany in 1999.

Cover Story 5 - Sino-German Innovation by the Numbers

Taking Stock of German Innovation in the People`s Republic
by PROF. DR. ZHENG HAN and THOMAS KÖNIG

Innovation made in China on the rise

What do a floating solar power plant, fleets of on-demand bicycle rentals, mobile QR-code payments, 3D-printed houses and the Tianhe-2 33.86-petaflop supercomputer that has topped the world’s most powerful computing lists for years all have in common? They are examples of innovation, made in China. The days of “made in China” as a synonym for knockoffs are long over, partly out of sheer economic necessity: as China is transitioning towards a knowledgebased economy, innovation is becoming a government priority, and by extension, the People’s Republic’s priority. Moreover, despite ongoing resilient economic growth numbers thus far, China certainly cannot afford to rest on its laurels: a 2015 McKinsey Global Institute (MGI) report stipulates that China must generate two to three percentage points of annual GDP growth through innovation, broadly defined, to maintain the government’s lofty economic growth goals. In that case, innovation could contribute as much as USD 3 trillion to USD 5 trillion a year to GDP by 2025. Initial efforts to promote China’s innovation capabilities seem to pay off: in 2016, the Global Innovation Index, which explores a broad vision of innovation, including the political environment, education, and infrastructure and business sophistication, identified China as the firstever middle-income economy among top 25 innovation performers. In the 2017 ranking China even moved up to rank 22 from rank 25 in 2016.

Challenges in the innovation ecosystem

Despite an increasing number of successful Chinese innovators and China’s improving ranking in the Global Innovation Index, China’s innovation ecosystem is far from being conducive to innovation. For instance, although the Chinese government has officially made innovation a priority, the sub-index ‘Regulatory Environment’ of the Global Innovation Index puts China on rank 107 of 127. Similarly, China ranks only 128 among 190 countries in the category “Starting a Business”. It appears that China still has a long way to go before it can generate systematic and sustainable innovation. What one can see so far among Chinese innovators is opportunity and marketdriven innovation with an initial focus on quantity before quality. Mobility service provider Didi, for instance, was initially very much oriented towards its US role model Uber. But in contrast to Uber, the Chinese company quickly broadened its range of services to win more customers: today, you can use the service to order normal taxis, chauffeurs, a limousine service, or even to look for carpooling options. Didi was pragmatic, following the principle: “Is that what customers want? Then we’ll provide it as quickly as possible before another company does and we’ll take care of the details later”. Business model innovation and quick trial-and-error cycles are the hobbyhorse of many successful Chinese start-ups. This all fits in well with the fact that Chinese consumers are very open to take risks and are quick to adopt new products, services, and business models.

While China’s macro-ecosystem may not yet be optimal for innovation, Chinese start-ups provide successful examples of innovation-conducive organizational behavior. Managing innovation is not only about managing stages of the innovation funnel, but also the creation of an innovation-fostering ecosystem. It should become a strategic priority for companies in the near future. Your competitor can copy one or two of your products, but can hardly imitate a sustainable innovation ecosystem in your organization.

German innovation activity in the People’s Republic

With more than 5,000 German companies active in China for decades, China’s focus on innovation offers untapped potential for Sino-German cooperation but also, naturally, for competition. Beyond buzzwords such as “Industry 4.0” and “Made in China 2025”, the German Chamber of Commerce in Shanghai, in cooperation with Tongji University and goetzpartners Management Consultants, decided to shed light on how German companies are coping in the Chinese innovation ecosystem and how they are measuring up with their Chinese counterparts – in other words, to what extent are German businesses in China ready to innovate with, for and in China? In early 2017, responses were assembled from a carefully selected group of German key industry representatives in China, mainly comprised of senior executives. Two thirds of surveyed companies have been in China for more than ten years. The results are in and they speak a clear language:

  • Innovation in all its forms will be a key driver of business activities in China.
  • Market forces, i.e. the needs to differentiate from competition, to attract new customers, and meet current customer needs, are the driving force behind their innovation activity.
  • Within the next three years, companies are expected to engage less in product innovation and move to business model innovation instead.
  • While the majority of companies still limits its R&D activities to global-to-local and local-to-local innovation, local-to-global innovation should be the next strategic priority for companies – a quarter of companies already engages in relevant research and this development is likely to gain momentum in the mid-term.

Barriers to innovation in Germany companies

At the same time, German companies in China see themselves confronted with several barriers in their efforts to drive innovation. Beyond ongoing concerns regarding the ability to find and bind qualified personnel as well as intellectual property concerns, the third largest barrier perceived by companies might also be the most surprising: Influence from headquarters in Germany is identified as a significant barrier to innovation, with 71% of respondents indicating it to be a barrier to a very large, large or moderate extent. Only 14% do not perceive headquarter influence as an impediment to innovation. Headquarter influence as a barrier to innovation may be rooted in a lack of autonomy for the China-based subsidiary. When it comes to market and product range decisions, 33% and 42% of surveyed companies respectively report to have relatively little autonomy. Around 20% of respondents claim to have high autonomy, i.e. freedom to make decisions about the market they serve and the product range they supply without consulting with headquarters. These companies also show higher innovativeness than their less autonomous peers. The subsidiary-headquarters relationship is undoubtedly a complicated one, but the results underline the inherent day-to-day challenge between (German) headquarters and their subsidiaries in China – the key question being: How much freedom will the Chinese entity enjoy localizing innovation decisions?

Making Sino-German innovation cooperation sustainable

As Sino-German business relations are entering a new era of innovation cooperation, the time has come to take stock of the current Sino-German business infrastructure to ensure continued success for German companies in China for the decades to come. Business model innovation, in all its forms, seems inevitable. German companies need to start asking how they can maximize their own innovative potential on the Chinese market. The potential for German companies to grow in China and to contribute their know-how to the emerging Chinese “knowledge economy” is unquestionably there. Concurrently, German companies, both at subsidiary level in China and at headquarter level in Germany, start to learn a lot from companies in the Middle Kingdom, particularly when it comes to redesigning value propositions and related business models. Only if wide-reaching protection of intellectual property rights is ensured, learning from each other will not become a zero-sum game and win-win can be sustainable. China and Germany have both proven that they have inherent innovative potential. The big question now is: How will we make the most of that potential? The authors believe that ‘coopetition’, a portmanteau of cooperation and competition, is the answer. China and Germany are different at many levels but complementary at the same time. Embracing Sino-German diversity can therefore be one of the best sources for innovation.

Further Information

Prof. Dr. Zheng Han is goetzpartners Chair Professor of Innovation and Entrepreneurship at the Sino-German School for Postgraduate Studies of Tongji University, Shanghai. Contact: zheng.han(at)tongji.edu.cn

Thomas König is the Manager for Strategic Projects and Executive Communications. He has worked with start-ups and has published articles and book chapters about China’s innovative capabilities. Contact: koenig.thomas(at)sh.china.ahk.de

The German Chamber of Commerce Shanghai’s Survey on German Business in China: Innovation in the Greater Shanghai Region 2017, in cooperation with CDHK/Tongji University and goetzpartners Management Consultants will be presented at the Industry 4.0. Forum in Shanghai on 25th October 2017. The President of Association of German Chambers of Commerce and Industry (DIHK), Dr. Eric Schweitzer, will also be in attendance and provide a “Berlin perspective”, by highlighting the innovative potential of businesses in Germany.

Cover Story 6 - A Paring of Giants

Industry 4.0. Meets China 2025
by CLAS NEUMANN

Since China wants to become the leading industrial power by its 100th birthday (2049), the “Made in China 2025” plan is seen as a major milestone, if its goals will be achieved. Germany is often seen as an ideal partner for China in the realization of its industrial 2025 ambitions, as the “Industry 4.0” platform is widely recognized as conceptional thought leading on a global scale. Also, it pushed the traditionally highly innovative German industry into the age of digitalization.

Nevertheless, there are controversial discussions on the current stage of the Chinese Industry: its capability to adopt Industry 4.0 concepts, the potential for German industry in these scenarios, and finally, whether it is wise to share the latest ideas and intellectual property with the strongest competitors of the future. In this article, the author will discuss the strategic implications of a stronger engagement of German industry in the China transformation agenda against the background of the opportunities in Industry 4.0.

What it is “Made in China 2025”?

As part of the broder 2049 goal of the PRC to become the world’s most powerful and most modern industrial country, the State Council approved and released in 2015 its ten year horizon plan “Made in China 2025”, which is widely recognized as a first important milestone in its 2049 ambition. Key points of the Made in China 2025 plan are enhancement capabilities toward a sustainable production of high quality products. It also focuses specifically on smart production, smart services, and smart processes – establishing China as the digital world in manufacturing. The overarching theme is: Quality first! (Zhiliang xian 质量先!).

As one can expect, the plan is very well structured and detailed into “Three Steps”, “Four Principles”, “Five Projects”, “Eight Reforms”, “Nine Tasks”, and “Ten Areas”. It would lead too far to discuss all these different aspects and areas of the plan. Nevertheless, for any company operating in China, it needs to be mandatory homework to understand those details, as budget allocation can be expected around those focus areas and key industries.

How to engage in China 2025?

Many German companies may wonder, how best to engage in such a broad policy framework. Actually there are two ways to be part of the fourth industrial revolution in China:

1) Thought Leadership in Industry 4.0

One has to understand that China is looking for any solution or product, that makes its manufacturing base more sustainable, intelligent, automated, or othervise innovative. As the central government publishes favorable policies in this field, many Chinese companies will get pushed to invest in those areas. Or in other words: it’s not about making the cheapest product possible at scale but to increase the value to the customer. This will create undoubtedly a strong demand for solutions, whether in equipment, software, or processes, that help in reaching those goals.While most German industrial companies are already present in China through production facilities and/or distribution networks, it will become increasingly important to be recognized as a thought leader in the area of Industry 4.0. This means that one needs to have a credible offer in the smart manufacturing world. Thought leadership needs also to be established by an active presence on relevant conference, contribution to jointworking groups, visibility on indutrial & IT fairs, and publications.

2) Joint Pilot Projects

Another opportunity is to participate in joint pilot projects, that are kicked off by the Ministry of Industry and Information Technology (MIIT) or its execution wing, CCID. There are sectors and cities identified that will receive special funds to enable a faster transformation of the industry. The same is true for joint R&D. Of course, one needs a Chinese partner to apply for such funds. This sometimes requires lengthy discussions on IP and contractual negotiations. Nevertheless, there are also significant rewards, from a visibility point of view and, at a later stage, also commercially, once these projects scale.

Currently, there are more delegations than ever from China touring Germany, which is often a first opportunity to get to know each other and to establish a first contact. Another way to enter the field of joint transformation projects are the MIIT offices on a provincial or central level.

Companies like SAP have been engaging in such pilot projects with major players in robotics (Shenyang Institute for Automation), machine building (Xugong), or IT infrastructure (Huawei). Knowledge in Industry 4.0, whether it’s process knowledge or leadership in technology elements, will also open doors for many SME companies from Germany – and open doors that may have been closed before.

What are the risks?

Many companies have created mixed experiences by enabling technology transfers during the last decades. Way too often technology was copied, altered, or adapted and used without license agreements. This risk will remain specifically as it is a declared goal of the China government to become a technology leader in the manufacturing sector. But it isn’t an option to just bring outdated technology to China or to try working in a “black-box” scenario, by trying to make key components completely non-accessible.

First, it doesn’t seem feasible that any Chinese company in the digital transformation would be satisfied with second-grade technology, given the guidance by the government. Second, it also looks unrealistic to protect technology to an extent that cannot be copied at all. A much better way is to stay ahead of the competition by innovating in faster cycles, using global and open networks, and engage deeply into local research.

What are the opportunities?

First and foremost, if Industry 4.0 meets Made in China 2025 becomes a successful scaling model, it can open an unprecedented growth of opportunities for both sides. German companies do have, for the second time since the opening of China through the reform process that started in 1979, the opportunity to be a key partner at the very beginning of an industrial transformation process in China. This time it could be even bigger than three or four decades ago.

Second, China has clearly passed the time where it is eagerly trying to attract foreign direct investments to advance in key industries. Consequently, there are already a few high-tech sectors, where Chinese companies have achieved not only world market leadership, but are also among the technological most advanced companies in the world. Favorable policies have pushed, for example, e-commerce firms into world-leading positions, along with e-mobility companies or network equipment giants like Huawei or ZTE. In many sectors, German companies would find partners on eyesight, ideally with complementary skills and capabilities. Furthermore, these companies have a much better access to relevant policy makers, research funds, and pilot projects, which would be beneficial for German partners.

Third, there are new technologies, which are currently just emerging and which will play a much bigger role in the Industrial Field than they do. The best example is the area of artificial intelligence and machine learning. Artificial intelligence is one of the emerging fields along with renewable energy, robotics, and electric cars where leaders in Beijing hope to take an early lead and help transform China into a technology pioneer. China would like to become a world leader in artificial intelligence by 2030 and one can see lots of activities in this field. These are no timely the giants like Tencent Ltd., Baidu Inc. and Alibaba Group, which are heavily spending to develop artificial intelligence for consumer finance, e-commerce, self-driving cars, and other applications. There are also universities, research institutes, and an increasingly start that invests significant resources in this field. To say it very clearly: Until the year 2025, many technological advances will be made in Germany, Japan, or China alike in smart manufacturing. It would be an act of gross negligence to believe one can remain a world market leader in this field without close collaboration in China.

In summary, there is a serious push in China for higher quality, sustainability, and individualization of production. Manufacturers are installing robots and other automation to cope with rising labor costs and improve efficiency while looking for even smarter technologies to develop new business processes and new avenues for revenues, specifically on the service side. The German industry needs to be in the driver seat to leverage its excellent reputation and the groundbreaking work, the Industry 4.0 Platform did to give the industry an excellent framework.

China did not reach all its industrial and economic development goals in the past. For example, the goal to sell five million e-cars annually by 2020 seems to be a very far stretch, given that only 300,000 e-cars were sold last year. Nevertheless, China today is the world’s largest e-mobility market and there is no reason to doubt that the same will happen in smart manufacturing and its technologies. Made in China 2025 will set the framework for this development and successful companies of the Industry 4.0 area have what it takes to be part of it.

Further Information

Clas Neumann is responsible for strategy and operations for SAP Global Labs Network and he also leads the orchestration of investments and cross-organization strategy to grow SAP’s business in emerging and fast growing markets. In 2014 he was named “IT Thought Leader” in China for his achievements in the area of smart manufacturing. He holds a MBA degree from INSEAD, Fontainbleau and Singapore.

In the Spotlight - Beyond Business and Trade

Interview with Dr. Christine Althauser, Consul General of the Federal Republic of Germany
by SIMONE POHL, OLIVIA HELVADJIAN, and JESSICA DOWNER 

Dr. Christine Althauser was appointed as Germany’s Consul General in Shanghai at the end of August 2017. She is therefore Germany’s highest ranking official representative in Shanghai as well as the Jiangsu, Zhejiang and Anhui provinces. Her task is to further Sino-German relations within the fields of politics, business, research and academia and culture.

The German Chamber Ticker team took the opportunity to speak to her about the constant growth China is enjoying, as well as opportunities for German companies in China and the hurdles women face in politics.

You have just recently arrived in Shanghai, what are your first impressions of the city?

At the end of the 1980s, I was posted to Beijing and to be honest, coming back was like returning to a different country. This time, I arrived at Shanghai’s Pudong airport, which had not even been thought of when I visited the city for the first time in 1988. As I only arrived recently, I have not had much time to explore Shanghai so far. At first glance, of course, with the landmark skyline of highrise buildings and modern architecture, the bright lights and multitudes of sounds, Shanghai is an impressive megacity with a very modern and international flair. On the other hand, walking through the streets and neighborhoods around Yongfu Lu, where the German Residence is located, I am happy to see that much of the traditional Chinese way of life is still there. I like cycling and try to explore a bit of Shanghai in doing so.

Could you tell us a bit about your background and working experience before you came to Shanghai? How did you become a diplomat and what was your most interesting assignment?

I grew up quite close to the French border. For me, other countries always held a certain magic and I have always been very curious about them.Thus, I decided to study political science and foreign languages in Heidelberg. I chose Russian and Chinese and was often asked: “Why?” My answer was always: “Why not?” I have been working in the Foreign Ministry since 1985.

It is impossible to say what the most interesting assignment was. Let me put it this way: I have worked twice in Moscow, and now I am in China for the second time. I am lucky I can use my background in my professional work. For a diplomat, it is essential to remain curious, to stay interested in different societies, cultures and languages. Diplomacy is only conceivable through people to people contacts. For me that is the essence of this thrilling profession.

What are the key topics on your agenda as new Consul General in Shanghai?

I am very much looking forward to working with our Chinese counterparts, as well as with the many German companies, institutions, scientists, artists and others who are working in Shanghai, as well as in the Jiangsu, Zhejiang, and Anhui provinces. The needs and interests of German businesses are of great importance to me and my team at the Consulate, and I am glad to have the German Chamber of Commerce among our strong partners here. Enhancing Sino-German cooperation in the areas of science and technology, culture and education as well as between the German and Chinese people will also be on my agenda in the years to come. Last but not least, the Consulate is a service center for German nationals, be they residents or visitors.

You are the second woman to head the German Consulate General in Shanghai since it re-opened in 1982. What is your experience as a woman in a leadership position and what recommendations or advice can you give to young professional women?”

In 1988, I met the then Consul General Dr. Hannelore Theodor (1985-1991). She was highly respected amongst the Consular Corps. She was nicknamed “Lao Tie” (Old Iron) as a mark of admiration. As for gender equality, I do have advice: stand up for your rights, show ambition and courage.

Most importantly – invest in your networking. I like the title of a German book on that topic: Gute Mädchen kommen in den Himmel, böse überall hin [Good Girls Go To Heaven, Bad Girls Go Everywhere]. There is a lot of truth in that. Never give up, there is still a long way to go, also in my country.

What topics do you find most relevant for German-Chinese bilateral relations, and in what fields do you think that cooperation can and should be intensified?

German-Chinese relations are closer, more intense and varied than ever before. The numerous high-level visits between our two countries in the past two years impressively demonstrate that Germany is a reliable key partner for China. Our bilateral economic relations are also very strong and interlinked. Over the past few years, China has become an increasingly important trading partner for Germany. However, we see shortcomings in the economic sector and welcome the fact that the State Council has recognized these shortcomings and asked ministries to attract more foreign investment and abolish impediments to the business activities of foreign companies.

We agree with the State Council that more has to be done on the ground. Foreign businesses in China still encounter too many arduous and even frustrating barriers. Take, for example, the 2017 catalogue for foreign investments which has just been published. Our companies have been waiting for years for the removal of investment restrictions such as joint venture obligations, equity caps and in other areas. Although the new measures contain a number of welcome changes, we still see significant room for improvement.

Our cooperation goes well beyond the field of business and trade. From cultural exchange to the long history of fruitful exchanges of scientists and students and a comprehensive bilateral cooperation in various academic fields – not to mention numerous city partnerships – our cooperation is multifaceted and colorful. It is important to keep the high standards we have reached – and of course, where possible, to improve relations further. An area that may allow more cooperation, in my view, is the exchange of young people, students and interns. For personal contacts between our peoples are very important and enriching and will help to improve mutual understanding.

Chinese investments in Germany have been a hot topic again recently, how do you think will this influence the development of our bilateral relations in the near future?

Chinese investment in Germany increased dramatically in 2016 and focused on the acquisition of German high-tech companies, whereas 90% of German investment in China focused on greenfield investments. Access to the German and European markets, a skilled workforce, technology acquisition and the quality of products “Made in Germany” are all important reasons for Chinese investments. Germany is their top choice because it is the gateway to the European market.

At the same time, however, critical voices have been raised, especially about the volume of Chinese takeovers. So how should we deal with this new trend? Chinese FDIs ensure that Germany and China continue to interlink economically, bring fresh capital to the markets, as well as create and maintain jobs. In addition, Chinese investment can – without any doubt – make sense from a business perspective. Overall, German companies have good experience with their new owners, including a long-term commitment to the location, employment guarantees and improved access to the Chinese market.

However, Chinese acquisitions are also viewed with a critical eye. On the one hand there is the uncertainty about the state’s influence: the ownership structures of Chinese companies sometimes lack transparency. Thus, private Chinese companies cannot be unconditionally regarded as economic operators pursuing exclusively economic motives. In addition, Germany offers free market access to Chinese investors and does not have a general protection mechanism for key German technologies. Beijing, on the other hand, continues to protect strategic industries from foreign access. As a result, German and other international companies face numerous formal and informal barriers in China and are often discriminated against in comparison to local companies. The lack of a fair level playing field based on reciprocity is a challenge to our bilateral relations: so far, China is not planning to open its market further to foreign investment. At the same time, with regard to Chinese investment in Germany, there are virtually no restrictions. Therefore, we will continue to address this issue with our Chinese partners.

What new growth opportunities would the Belt and Road Initiative bring for German companies?

China’s Belt and Road Initiative has become a cornerstone of Chinese foreign policy as a project of regional integration, intercontinental cooperation and deepened economic relations. Better connectivity is the key word. To ensure that the Belt and Road Initiative and European plans benefit from each other, the two sides decided to create a coordination mechanism that aims to guarantee a rules-based and transparent planning process for projects. During the most recent Chinese state visits to Germany, Chinese leaders underlined that they have identified Germany, being one of ist major trading partners, as a major partner at the western end of the “New Silk Road”.

We welcome China’s efforts to use the Belt and Road Initiative to expand the infrastructure of the countries involved in a way that benefits their economies. As Brigitte Zypries, the Federal Minister for Economic Affairs and Energy, stated on the Belt and Road Forum in Beijing in May: “We know that China has recently spoken out in favor of free trade and against protectionism. In the light of this development, I will be advocating open markets, equal treatment for foreign companies, and the removal of the barriers to trade and investment that still exist.”

China is putting a strong focus on its “Made in China 2025” blueprint for upgrading ist industrial sector, how can German companies benefit from this transition?

With its “Made in China 2025” strategy, China is increasingly trying to digitalize its industry. In a way, it follows the German “Industrie 4.0” model. China has indeed been catching up technologically. Whereas in former times we saw that the economies of both countries complemented each other very well, there are now new challenges. The said development has led to increased competition between German companies and their Chinese competitors. That is why the creation of a level playing field, as I mentioned before, has become even more important to us than before. Regarding “Industrie 4.0” in particular, we see a discrepancy between what the digitalization of the economy needs and the new regulations being implemented, especially with regard to China’s recent cybersecurity law and plans for further restrictions to virtual private networks (VPNs).

What are the next stages for the Sino-German partnership on innovation?

China and Germany have a long tradition of cooperation in science and technology. Since 2011 this partnership has been strengthened through a process of annual consultations between the two governments. In 2014, German Chancellor Angela Merkel and Chinese Prime Minister Li Keqiang agreed on the establishment of the Sino-German Innovation Partnership and introduced its first program, “Jointly shaping innovation”. Since then four Sino-German Innovation Conferences have taken place linking key universities, companies and entrepreneurs from the two countries.

By the end of 2016, a further agreement on deepening scientific cooperation and the exchange of young entrepreneurs from the two countries was reached. Furthermore, as part of the Sino-German Innovation Partnership, the German-Chinese Platform on Innovation was established. It serves as a tool for German and Chinese companies and scientists to enable networking and exchange vis-à-vis the respective innovation systems and technologies. The Innovation Partnership has already lent a great deal of momentum to joint research cooperation. The 5th Sino-German Innovation Conference is scheduled to take place in Beijing in February 2018.

The German Consulate has been a strong partner and supporter of the German Chamber’s initiative “More than a Market”. How important i s corporate social responsibility for doing business (in China)?

Corporate social responsibility (CSR) is a way for companies to benefit themselves while also contributing to society. I am convinced that a strategic approach to CSR is increasingly important to a company’s competitiveness, be it in Germany or China. It can supply added value in terms of risk management, cost savings, access to capital, customer relationships, human resource management, and innovation capacity. CSR has a long tradition in Germany. And I am glad to hear that more and more companies in China are becoming aware of their social responsibility. It is obvious that Chinese customers are deeply interested in the public image of institutions and I think it is no secret, just common sense, that employees like working for a company that has a good public image.

Dr. Althauser, thank you very much for your time.

Features 1 - Legal Update

Recent Developments in the PRC Foreign Investment Regime
by Dr. ULRIKE GLUECK and MICHAEL MUNZINGER

Lately, there have been quite significant changes to the foreign investment regime of the People’s Republic of China (“PRC”). These changes impact all foreign investors intending to engage in the PRC by way of greenfield investments in form of establishing a foreign-invested enterprise (“FIE”), i.e. wholly foreign-owned enterprises (“WFOE”), Sino-foreign equity joint venture enterprises (“EJV”) and Sino-foreign cooperative joint venture enterprises (“CJV”), or by way of acquiring shares or assets of already existing FIEs or domestic enterprises. The changes also considerably impact corporate changes of already existing PRC entities.

Establishment and corporate changes of FIEs
Shift from ex-ante approval to (ex-post) record-filing

  • Until October 2016, the establishment of as well as the implementation of most corporate changes with regard to FIEs, such as but not limited to changes of registered capital, legal address, company name and business scope as well as changes of the shareholding structure and liquidation, were subject to examination and approval by the competent examination and approval authority, i.e. the competent Bureau of Commerce (“BoC”), and registration with the competent registration authority, i.e. the competent Administration for Industry and Commerce (“AIC”). According to the Provisional Measures on Management of the Establishment and Changes of Foreign Invested Enterprises (“Provisional Measures 2016”) which entered into effect on 8 October 2016, the approval and examination procedures regarding FIEs have generally been replaced by much simpler record-filing procedures, if such FIEs are not listed in a so-called Negative List.
  • Compared to the examination and approval procedures, the most important new features of the record-filing procedures are as follows:
  1. In record-filing procedures, most application documents do not need to be submitted to the competent BoC onsite anymore. Instead, the relevant information can be filled in on an online platform and relevant documents can be uploaded and transmitted as scan copies.
  2. The competent BoC shall not conduct a comprehensive content-related examination of the application documents anymore but only check them for completeness and formal correctness.
  3. The BoC shall generally complete the record-filing procedures and issue the related recordal certificate within three working days. This is considerably shorter than the duration of examination and approval procedures which usually takes at least around two weeks.
  4. Issuance of the recordal certificate by the competent BoC is not a precondition for registration with the AIC anymore. Now, the AIC shall generally accept applications for registration without the recordal certificate being submitted. Generally, record-filing with the BoC can be made either before completion of the registration procedures with the competent AIC or within 30 days after completion of the registration procedures with the competent AIC. However, depending on the locality, certain PRC authorities handle this differently in practice. Thus, the practice of the competent authorities should be checked for each case in advance.

Negative List

Decisive for the question whether approval or record-filing is required, is whether the respective entity to be established or subject to corporate changes is listed in a so-called Negative List.

  • Until 28 July 2017:

According to Circular (2016) No. 22, from 8 October 2016 on, for the Negative List, reference had to be made to the Guideline Catalogue on Industries for Foreign Investment, 2015 Revision (“Guideline Catalogue 2015”). The Guideline Catalogue 2015 distinguished between industry sectors in which foreign investment is encouraged, restricted or prohibited. According to Circular (2016) No. 22, for those FIEs which did not fall into the prohibited or restricted categories and those FIEs in the encouraged category which were not subject to requirements on the shareholding ratio or senior management, the examination and approval procedures had been replaced by record-filing procedures.

  • Since 28 July 2017:

On 28 July 2017, the new Guideline Catalogue on Industries for Foreign Investment (2017 Revision) (“Guideline Catalogue 2017”) entered into effect which applies to all foreign investments in the PRC outside of special pilot free trade zones (“FTZs”). In FTZs, the Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones, 2017 Revision apply.

The Guideline Catalogue 2017 formally introduced the negative list approach. It distinguishes between industries where foreign investment is encouraged (“Encouraged Category”) and a Negative List which refers to industries where foreign investment is restricted or prohibited. Certain industries are listed in the Encouraged Category and simultaneously in the Negative List, since they are both encouraged, but also subject to certain restrictions, e.g. a maximum shareholding ratio of the foreign investor.

The new Guideline Catalogue 2017, inter alia, includes the following key items:

(1) Encouraged Category

Industries listed in the Encouraged Category may enjoy preferential treatment based on the relevant policies. Compared to the Guideline Catalogue 2015, the total number of encouraged industries has been decreased by one to 348 in total. Seven industries have been removed and six industries have been newly added. Further, 35 industries have been modified.

The following industries have been newly added to the Encouraged Category:

  • Certain industries in the field of environmental protection, e.g. manufacturing of flue gas desulfurization equipment as well as flue gas dust removal equipment;
  • Certain high-tech manufacturing industries, e.g. research, development and manufacturing regarding virtual reality (VR) and augmented reality (AR) equipment as well as the manufacturing of certain 3D printing components;
  • Certain industries regarding special purpose foodstuffs, e.g. the development and manufacturing of infant formula, special medical use formula and health food; and
  • Development and manufacturing of smart emergency medical rescue equipment.

(2) Negative List

(a) Restricted Category

The restricted category contains 35 industry sectors which are restricted for foreign investment. Compared to the Guideline Catalogue 2015, the number of industries in the restricted category has been reduced by three. Foreign investments in industries listed in the restricted category may be subject to special requirements on the shareholding ratio of FIEs, special investment methods (e.g. the FIE must be established in the form of a Sino-foreign equity joint venture or cooperative joint venture), administrative approval or other restrictive measures.

Key changes are, inter alia, as follows:

The manufacturing of motorcycles is no longer subject to the requirement of having an equity joint venture company and the limitation of having two equity joint ventures at the maximum for the manufacturing of motorcycles has been abolished;

While the manufacturing of conventional automotive vehicles is still subject to the requirement that at least 50% of the equity interests are held by Chinese investors and the limitation of having two equity joint ventures at the maximum for the manufacturing of the same type of vehicles per foreign investor, the manufacturing of pure electric cars is now exempted from the above limitation to two equity joint ventures at the maximum.

In addition, some restrictions regarding encouraged but restricted industries have been deleted. E.g. the manufacturing of key parts and components of new energy automotives, such as high energy power batteries (energy density ≥110Wh/kg, cycle life ≥2000 times) is no longer subject to the restriction that the shareholding ratio of foreign investor(s) must not exceed 50%.

(b) Prohibited Category

The number of industries listed in the prohibited category has been reduced from 36 to 28 compared to the Guideline Catalogue 2015. However, especially in cultural and media related industries, certain prohibitions have even been increased. While the Guideline Catalogue 2015 prohi b i ted t he publ i cat i on of books , newspapers, magazines audio-visual products and electronic publications, the Guideline Catalogue 2017 now also prohibits the editing of the aforementioned items. Further, the Guideline Catalogue 2017 now also prohibits foreign investment in radio and television on-demand businesses, installation services regarding ground facilities for receiving satellite TV broadcasts, public internet information services and the establishment and operation of research institutes regarding sociological and social sciences.

Further Expansion of the Application of Record-filing Procedures

In the past, the acquisition of shares or assets of a domestic company by foreign investors, i.e. so-called mergers and acquisitions according to the PRC Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (“M&A Provisions"), has been subject to examination and approval by the competent BoC. Originally, the BoCs at provincial level were in charge.

In the past years, gradually the approval competence had been further delegated down to the BoCs on city and even district level. However, contrary to wide spread expectations, merger and acquisition projects were not covered by the first round of regulations which shifted FIEs from ex-ante approval to recordfiling, i.e. they remained to be subject to examination and approval procedures. On 30 July 2017, the PRC Ministry of Commerce further revised the Provisional Measures 2016 and promulgated the Provisional Measures on Management of the Establishment and Changes of Foreign Invested Enterprises, 2017 Revision (“Provisional Measures 2017”) which entered into effect on the same day together with the Announcement on Relevant Matters concerning the Filing Administration of Establishment and Changes of Foreign-Invested Enterprises (“Announcement 2017/37”).

(1) According to the Provisional Measures 2017 and Announcement 2017/37, now also the transformation of a purely domestic company into a FIE by way of a M&A transaction through merger and acquisition is only subject to the simplified record-filing procedures, if the newly transformed FIE does not fall into the Negative List.

This represents a remarkable change, since the above-mentioned Circular (2016) No. 22 expressly stipulated that the shift from ex-ante approval to (expost) record-filing did not apply for M&A projects through merger and acquisition. Since 30 July 2017, now also M&A projects through merger and acquisition are subject to mere record filing, if the to be newly established FIE does not fall into the Negative List.

However, the Guideline Catalogue 2017 expressly stipulates that so-called roundtrip investments, i.e. an acquisition of a domestic entity by a domestic entity or individuals using a company legally established overseas or controlled by domestic shareholders as an investment vehicle, shall be handled pursuant to the prevailing provisions. I.e. roundtrip investments are currently still subject to examination and approval procedures.

(2) The Measures 2017 and Announcement 2017/37 also clarify that foreign investors, which make strategic investments to qualified non-foreigninvested listed companies, or to qualified foreign-invested listed companies (i.e. those which do not fall into the Negative List), within the scope prescribed in the Measures 2017, also only have to handle record-filing procedures. According to the Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors, the term “strategic investment” refers to the acquisition of "A" shares in listed companies by foreign investors through medium- and longterm strategic merger and acquisition investments of a certain scale.

The record-filing formalities shall be submitted 30 days before or after registration with the securities registration and clearing organization. Upon completion of filing, where there is a change regarding the filing information regarding strategic investments, change filing formalities shall be submitted within five days from performance of the information disclosure obligations by the information disclosure obligor(s) as required by the PRC Securities Law and the relevant provisions.

(3) While the procedures for M&A projects have generally been simplified, there have also been some additions to the documents to be submitted to the competent PRC authorities. Some examples:

  • A shareholding structure chart indicating the ultimate actual controlling party of the FIE has to be submitted, if a FIE or its investors apply for record-filing of the incorporation or corporate changes of such FIE. When there is no change of the ultimate actual controlling party of the FIE, such shareholding structure chart is not required;
  • If a foreign investor uses equity interests of an overseas company for payment, i.e. in case of a share swap, the Enterprise Overseas Investment Certificate of the domestic enterprise which obtains the equity interests in the overseas company shall be provided.

In summary, now, examination and approval is basically only required for M&A transactions and for strategic investments in listed companies within the scope of the Negative List and for roundtrip investments.

The Measures 2017 and Announcement 2017/37 constitute a major breakthrough for M&A projects and for strategic investments in listed companies and considerably simplify and shorten the timeframe for these projects.

Conclusion

The general shift from ex-ante approval to (ex-post) record-filing procedures, if the respective project or entity does not fall within the Negative List, is a major step forward and an improvement for foreign investors since procedures became easier and faster. Thus, the reforms set out above can be described as another landmark on the PRC’s long way to decrease investment red tape and further open for foreign investment. However, the respective statutory regulations are still a patchwork of various regulations, interpretations and administrative measures.

It is to be hoped that further adjustments will be made in the near future to provide more clarity and eliminate ambiguities. E.g., the main legal basis for M&A transactions regarding domestic enterprises, i.e. the M&A Provisions, still refer to examination and approval procedures in all cases and are, therefore, now clearly in conflict with the new legal reality. Existing and potential foreign investors in the PRC should, therefore, carefully pay attention to future developments in this field in order to stay up to date.

Further Information

Dr. Ulrike Glueck is Managing Partner of CMS, China.

Michael Munzinger is Senior Associate at CMS, China.

Ranked as a Top 10 Global Law Firm, CMS can provide a full range of legal and tax service in 40 countries with 71 offices. Together with 4,500 CMS lawyers worldwide, CMS China (Shanghai, Beijing and Hong Kong) offers business-focused advice tailored to your needs. For more information, please visit - cms.law/en/CHN/

 

 

Features 2 - Five Traps to Avoid When Managing Commercial Properties in China

How Some Multinational Firms Lose Millions on their Office and Factory Premises
by BJARNE BAUER

Many multinational corporations fail in China because of poor real estate decisions. Why is easy enough to understand:

  • The China commercial property market is still relatively immature, with its legal framework, local zoning and often market supply and demand situations less stable than western Europe or The United States. Less stable, of course, means less predictable.
  • The market is also highly opaque. Brokers represent both landlords and tenants at the same time, for example, and invisible relationship networks often influence transaction outcomes.
  • Property is often the major capital expenditure of a company; as such, a firm’s chances for survival and growth may be largely decided by the real estate decisions of its management.

As getting real estate right is so crucial yet so difficult for companies in China, the author has listed five kinds of mistakes that companies make time and again, as seen in his company’s 12 years in the business. All these mistakes are of a fundamental nature and could be made by corporate real estate managers in any country – they just seem to happen to China corporate managers about ten times more frequently.

1) Acquiring real estate with wrong zoning or incomplete property titles

In China, real estate zoning matters tend to be addressed in a dogmatic way, often focusing on letter of the law and not on pragmatic considerations. Incomplete land or property documents can lead to firms losing outright a property they rented or even bought, including the investments they made in refurbishing the property. This typically also entails additional losses due to business interruption. Zoning and documentation issues include:

  • Properties that do not qualify for certain usages, such as registration by foreign business entities.
  • Properties inside of development or business parks which haven’t received complete overall clearance from authorities, for example a fire safety certification that the developer expected to obtain in a few weeks ends up taking half a year.
  • Land which is provided by the government with an allocated landuse-right (LUR) instead of a granted LUR; allocated LURs generally come with no guaranteed use period.
  • Land or properties with zoning that is different than the needed type, e.g. residential instead of commercial or commercial instead of industrial.

Remember that the wording in the business certificate counts the most, not actual daily operations.

2) Overpaying

China’s commercial real estate market is somewhat notorious for ist lack of transparency and inefficiency. Landlords may raise or lower their rates based on reasons that aren’t evident to an outsider. Such reasons may include their firm’s internal politics, pressure from financing banks, or a personal opinion on the quality of a tenant’s brand.

When there are conflicts of interest, the risk of overpaying can become even greater. Such conflicts of interest may involve own staff who engage friends or family members to handle the real estate acquisition, or may occur when the brokerage firm’s main business revolves around assisting landlords achieving a higher income.

Another reason why multinational companies overpay when renting or buying commercial premises is the mistake of focusing on a single property too early. This steers the company into a weaker negotiation position. Basic good practices of procurement shouldn’t be forgotten in real estate negotiations.

3) Overlooking or spoiling opportunities

Some multinational companies use inappropriate tools or partners to acquire their industrial building or office premises. A typical example is when the firm hires a broker that focuses on residential property. The residential and commercial markets function differently, sometimes in completely opposite ways. If the brokerage firm engaged has residential property as the main business focus, then one shouldn’t be surprised if their resources and systems for commercial property are limited. Remember that investigating all opportunities is more crucial in commercial real estate, because within the desired location, budget range and requested size, the number of choices is generally limited in the first place. Again, it is important to ensure that the service provider one engages isn’t partial to certain buildings but is in a position to objectively help the buyer or tenant compare options and assist in negotiating for the best rates possible.

Confusing or upsetting landlords is another way that foreign firms lose opportunities. If a firm tours several properties owned by the same developer with varying agents, the landlord may interpret this as a lack of professionalism and sincerity and refuse to offer the unit to the prospective tenant. It is therefore important to compare service providers at an early stage, and to only start visiting properties once a decision for a preferred partner has been made.

4) Applying wrong comparisons

Real estate information in China, as elsewhere, is often misleading – sometimes purposely so. Always ensure that “apples” are being compared to “apples”, and not apples to bananas. For example: the gross square meter amount stated on the real estate certificate of a certain building may be higher than that of another building, but in reality its net square meter amount is smaller because of a low efficiency rate.

Or you fail to notice that one of the buildings being viewed already has air-conditioning equipment installed while another building does not. Based on the first look, one may eliminate the first building as too expensive when , the second one will end up costing more. The way that commercial terms are quoted likewise can be misleading. Are rentals quoted as effective rentals or as face rentals? Are there free lease periods and how long are they? Do facility management fees still need to be paid during such free lease periods? Are parking lots included for free or do they come at an extra charge? And so on.

5) Wrong or suboptimal building for company’s specific needs

A common and potentially disastrous mistake is choosing a beautiful new building in a location that turns out quite unattractive, for example because of poor public transportation. This can lead to a mass exodus of staff, greatly harming a firms business. Given size and transport situation of large Chinese cities, it seems that where compromise is needed, staff are willing to cope with older, less attractive facilities as long as they are in a good location, but not the other way around.

Places that are too big in size also tend to work badly. They usually cost more to rent or buy, as well as maintain and operate. A sparsely populated space, moreover, easily gives people the impression of a dull and unsuccessful environment.

Buildings that are overly lavish in appearance can be an issue, too, even when they match the available budget. Depending on your industry and business model, premises that look too luxurious may send wrong signals to clients and suppliers, raising questions as to whether you may be charging them too much and paying them too little.

In the same way, buildings in poor condition may scare away clients and make talent attraction difficult. Public facilities such as washrooms are often seen a reflection of how a company does ist homework. Another easily overlooked aspect involves safety; issues may include malfunctioning elevators and poor traffic management. Foundations of Success.

Opportunities in the China market are still more abundant than they are in most of the world; just remember that the opportunity surplus comes with a plethora of risk. The five China commercial property traps listed above are easily avoided with just a little attention. It takes more to dodge the market's subtler dangers, and more still to ensure that a substantial corporate property portfolio is optimally aligned for enterprise success. When needed, a firmly established and reputable commercial real estate consultancy with local expertise can provide the guidance, research and intelligence needed for sound decision making.

Further Information

Bjarne Bauer serves as Managing Partner in China at NAI Sofia Group Shanghai. He has been working in the commercial real estate industry for 17 years: four in Germany and 13 in China. NAI Global is a leading global commercial real estate brokerage firm with more than 400 offices worldwide. Feel free to contact the author with questions or comments, or to receive free checklists for avoiding property related risks and ensuring the value of your China premises. Phone: +86 21 6230 1919 ext. 808, bjarne(at)sofiagroup.com.

Features 3 - Continued Lower Wage Growth Increasingly Aligns Labor Cost with Productivity

Results of the German Chamber of Commerce in China’s Labor Market and Salary Report 2017/18
by JOSIPA MARKOVIC and JUANJO CARDONA

China’s economy continues to expand, growing at 6.9% in the first half of the year, beating most forecasts as well as the government’s annual growth target set at 6.5% for 2017. However, to a considerable extent, the speedy growth was driven by traditional growth drivers – emphasizing China’s need to progress in its transition towards a more sustainable consumer driven growth model. In particular, a strong property market and soaring house prices have increased construction investment and stimulated the economy in the first half of the year.

Nevertheless, growth in the world’s second largest economy is likely to have peaked for this year, as the positive economic growth figures give authorities more buffer to push for additional regulations – i.e. controlling for financial risk, tackling excessive debt and reducing overcapacity in the manufacturing sector. First approaches of the government on clamping down on risky debt and property speculation have already shown signs, resulting in a slowdown of key growth figures in July.

Urbanization to offset for shrinking labor force

Today, more than half of China’s population live in cities. More precisely, as of 2016, China’s urban population accounts for 56.8%, approaching the target established in the 13th Five Year Plan of 60% by 2020. Urbanization is an essential part in China’s structural reform: On the one hand, urban population triggers consumption, accelerating the service sector’s contribution to economic growth. On the other hand, it alleviates China’s pressing issue of a shrinking labor force, with China’s ageing population reaching 200 million people being 60 today and an estimated 500 million over 60s by 2020. Since 2010, the estimated population at working age has been already diminishing. The latest official figures show a working force of 73.0% of the total population in 2015, estimated to decrease to 70.8% by 2020. The ageing population as well as an improvement in living conditions and higher life expectancy puts pressure on raising the retirement age – currently being set at 60 for men, 55 for female civil servants, and 50 for female workers. With urbanization expanding, the labor market is also showing resilient growth, with 7.35 million new jobs created in urban areas in the first half of the year, making it likely to achieve the annual target for new urban jobs of 11 million.

Slowdown in national wage growth in order to maintain competitiveness

After a rebound in 2015, where national salaries experienced doubledigit growth, wage growth in China slowed down in 2016 to 8.9% year-on-year. The annual average wage in China increased to RMB 67,569, up RMB 5,540 from 2015. According to the German Chamber of Commerce in China’s own estimates, based on past GDP, inflation and salary growth, 2017 will close at a similar growth rate (8.4%).

Compounding our wage growth estimates for 2016 and 2017 with actual average growth from 2012 to 2015, China’s average growth rate is expected to be at 9.8% for the six year period. The top three provinces by wage growth are all located in western China. The least developed provinces in the west have been experiencing the highest growth in an effort to catch up with the more advanced ones, most of them surpassing China’s average growth rate (2012-2017).

China’s minimum wages are set annually by regional governments based on their local economic conditions. Traditionally, minimum wage adjustments take place in the first semester of the year. However, as of July 2017 only five municipalities or provinces have raised their minimum wages, emphasizing a clear trend: While in 2014 a total of 24 of China’s provinces increased the minimum, it was only 19 provinces in 2015 and nine last year. This downward trend suggests that provincial governments are trying to prevent labor costs to rise in the attempt to keep their local economies competitive.

Wage growth at German companies slowing further 

German companies in China expect to increase wages in 2018 by an average of 5.90%, 0.33 percentage points (p.p.) down compared to last year. This aligns with the general downward trend the survey has been recording since the Chamber started surveying at China level in 2012. However, it should be noted that this is the lowest year-on-year decrease since 2015.

Because of the correlation between GDP and salary growth rates, the lower decrease of wage growth rates might indicate an expectation of a more moderate decrease of economic growth. While the evolution of wage increases in German companies follows a similar pattern as the wage increases on a national level, wage growth is higher in the latter (on average 1.7 p.p. higher since 2012), partially due the fact that wages at German companies are already at a considerably higher level.

The salary survey evaluates in detail how wage increases in specific functions and regions contributed to the overall expected 5.90% wage increase, the key statements being the following:

Only a few industries – automotive, consulting / legal services, medical supplies and construction – expect to put forward higher wage increases than the overall China average of 5.90%.

By company size the slowdown in wage growth is most notable at smaller companies (less than 50 employees), balancing out a higher than average expected increase in the previous edition. In particular, companies with less than 50 employees expect to put forward an increase of 5.74% - 0.78 p.p. below last year’s figure. Larger firms remain fairly stable, giving away just 0.08 p.p. against last year’s expected wage increase. By city tiers, there is a similar pattern to last year’s results, with tier-2 cities putting forward the highest wage increases (6.02%) and tier-3 cities presenting the lowest increase (5.74%). However, only tier-3 cities expect to accelerate wage growth compared to last year: +0.15 p.p. above the expected increase for 2017.

Narrowing gap between salaries and productivity

When evaluating salaries taking productivity and qualifications into account, 21.7% of respondents consider wages to be low whereas 28.9% of the companies surveyed consider salaries to be high. No significant changes in comparison with last year results in this regard at China level. Looking in more detail, at tier-1 locations – i.e. the highest paying area – 36.3% of respondents in Shanghai consider wages as high whereas Shenzhen, Guangzhou, and Beijing show a lesser tendency to rate their compensation levels as high: 28.0%, 25.0% and 21.3%, respectively – a particularly interesting pattern, given that wages (median value for total cost per employee) in Beijing are 1.17 times higher than those of Shanghai.

However, as German companies continue to put forward lower wage increases, the gap between salaries and productivity narrows, 64.0% of the respondents declare productivity gains have been similar to wage increases (+15.5 p.p. over last year’s), while 22.5% finds productivity gains did not make up for the wage increases, 6.3 p.p. down from last year’s mark.

Further Information

Josipa Markovic is the economic analyst of the German Chamber Shanghai. She is responsible for the Wages and Salary Report and can be reached at Markovic.josipa(at)sh.china.ahk.de.

Juanjo Cardona is the marketing and information solutions manager at Direct HR Group, where he is responsible for the execution of the Wages and Salary Report. Find him at j.cardona(at)directhr.cn.

The Labor Market and Salary Report 2017 was conducted in cooperation with Direct HR.

Direct HR Group provides best-of-class solutions in managing human capital, by helping organizations to better lead, recruit, assess, develop and inform. With a team of 50 professionals across four cities in China – Beijing, Shanghai, Ningbo and Shenzhen – Direct HR Group is able to speak eye-to-eye with their client partners and execute on the ground. As of 2017 it has served over 800 foreign and Chinese clients, from multinationals to SMEs.

The results of this year’s Labor Market & Salary Report were presented by the German Chamber of Commerce in China in Shanghai (15th September 2017), Suzhou (18th September), Taicang (18th September), Beijing (20th September), Shenyang (21st September), Tianjin (22nd September), Shenzhen (26th September) and Guangzhou (27th September). For more information about these events, please visit our events section on our website www. china.ahk.de/chamber/events.

The full report is available for members only free of charge, formore information, please contact your regional Chamber office.

More than Business - Make the People Hear You

Public Perception of CSR and Communication Strategies
by DR. EVELYN ENGESSER and DR. STEFAN JUSTL

75 projects were submitted to win the 2017 More Than a Market Award, a joint initiative by the German Chamber of Commerce together with Bertelsmann Stiftung and the German Consulate General in Shanghai. An analysis of the 67 projects profiled in the booklet “More than a Market 2017” gives insights on the characteristics of these projects, the communication channels used, and the media coverage earned. What stories do companies tell? Which communication strategies are successful? Which storytelling principles help to gain interest?

A systematic content analysis of the 67 CSR-projects shows:

  1. Target groups: More than half of all projects were aimed at education, with kindergarten and school kids as the favorite target group. Students, trainees, and apprentices are less often the beneficiaries of CSRprojects. Only three projects targeted elderly people.
  2. Purpose of the projects: Besides education, all other areas receive much less attention: Inclusion, environmental protection, health, eldercare, intercultural exchange, and food.
  3. Duration: More than half of the projects had been set up in 2014 or before. German companies obviously aim at long-term engagement. The longest-running project, Henkel’s “Make an Impact on Tomorrow” (MIT), was established in 1998. One reason for ist success is its flexibility. It is a corporate volunteering program that addresses various social needs, including education, science, fitness, health, arts, culture, and environmental protection. Employees can participate in ongoing projects or propose and lead new ones.
  4. Involvement: In two thirds of all projects, the involvement of the company was high. This is indicated by a high participation rate of employees and is typically the case in volunteer campaigns and regular or long-term events. Low involvement is characteristic for donations, one-time events, or projects that are managed by a small task-force only.
  5. Relation between company and project purpose: In half of the projects, a strong link between company and project purpose can be seen. A few examples: Adidas established a school football program, BASF teaches children in a kids’ lab, ZEISS trains eye doctors, thyssenkrupp started an elevator safety campaign, and METRO initiated a food bank. Projects were related to the company’s industry, company products are donated, employees or suppliers targeted. For other projects, the link between project purpose and company purpose was less obvious: MANN+HUMMEL is caring for sick children, Freudenberg has a bookworm program, Continental initiated a forest marathon. The analysis shows that projects for students, trainees/apprentices, employees, and senior citizens were typically related to the company, whereas projects for children were often not related to the company.

Companies who want to establish a new CSR project should ask themselves: Do we want to follow a well-trodden path and engage in an education project for children? Or shall we go off the beaten track? Do we want to present a new project each year, or do we want to tell an ongoing success story? How can we achieve high involvement? And while a strong link between company and project is not a must, it definitely helps the public and the media to recognize and remember.

Which channels are used to tell the story? Firstly, internal communication channels should be considered. These are crucial to communicate the outlines and the success of projects. Each employee should be aware of CSR-activities and should have the chance to participate. Intranet, employee magazines or newsletters, staff meetings, internal social media tools are good ways to keep everybody up to date.

External communication is important to spread the news to the public. An analysis of the external channels used by the participating companies came to astonishing results. About half of the projects did not use WeChat. About half did not use Weibo. And about half did not send out a press release. 22 of the 67 projects did not use any of these popular channels. But is silence really golden? Or wouldn’t it be better to do good and talk about it?

Companies that decided to communicate their efforts most often used a dedicated CSR page on their company website, posted on their official Weibo and WeChat accounts, or sent out a press release. Less often found were mentions in other parts of the company website, CSR annual reports, public events, films, mentions in annual reports, or media partnerships.

As many companies did not or only scarcely use external communication channels, it is no wonder that some projects didn’t receive any media attention. A systematic content analysis of media coverage about the 67 CSR projects for the period from January 2016 to May 2017 shows:

  1. 33 projects received media coverage in online media, WeChat, and/ or Weibo. 34 did not.
  2. Two thirds of the 1,615 articles/posts published were on WeChat, one fourth in online news media, and one tenth on Weibo.
  3. Big companies make big noise – their stories are more often found in the news. But there are exceptions. Projects from Kaercher, Vaillant, and Shanghai Harmony all made it to the top 10. This shows that successful media activities and good media relations can also be achieved by smaller companies and projects.

But how to attract media attention and engage people for a CSR project? Storytelling can give us some answers here.

What makes stories so powerful?

Stories have an enormous impact. Impact is what is needed to engage people in social projects. What makes stories so powerful? First, entertainment is a deeply rooted need of all humans. From the cave paintings in the Stone Age to the fairy tales of the Brothers Grimm to Hollywood Block Busters, people want to be entertained. Second, stories create pictures in our heads and thus are easier to remember than pure facts. Third, stories create an emotional relationship. According to various findings from the field of neuropsychology, our brain is far more engaged by stories than by facts. Data only activate the language parts of our brains to decode the meaning. Stories activate the same parts of the brain that are active when we experience things. It is not the facts and figures that make people invest time and money into social projects, it is the feeling to do the right thing, because it feels right.

Five elements of a good story

Whether in novels or in movies: five elements of storytelling can be found in most good stories.

1) Reason

A good story starts with a reason why it should be told. The “why” moves people more than the “how”. Why is it worth telling the story of a Hobbit trying hard to destroy a ring? Because the story told in the "Lord of the Rings" teaches us that even the supposedly smallest and weakest being can change the course of things. In this case, save the world, or at least Middle Earth. CSR projects cannot save the world. But they show us that we can make the world a better place. This is what Uwe Brutzer from Bach’s Bakery tells us, when training and employing deaf people, bringing them from isolation back to society. We can find this theme also in the E.G.O. Summer Camp, organized by the company so that parents (migrant workers) and their children can live together for six weeks, and not just for a few days over Spring Festival. The reason of CSR stories is to tell that we can make a difference.

2) Hero

A good story needs a hero. However, it is not a super hero with super powers. It is not Gandalf the mighty wizard in The Lord of the Rings. It is Frodo Baggins, an ordinary Hobbit. The charm of the story is that a normal human being becomes a hero. Heroes of CSR stories are the migrant children in the Kids Football Project, who experience not only fun in practicing, but solidarity and team spirit in a group. Heroes are the underprivileged children from rural areas, who with the help of the Rose Plastic online English-teaching program get access to knowledge and education which could spark their future. Companies telling CSR stories should understand: not the company is the hero, it is the people they help. The company should be the helper, not the hero.

3) Conflict

In a good story, there is a conflict that needs to be solved. In classical storytelling, the hero must face a challenge, goes on a journey, crosses obstacles and returns as a new person. Like Frodo, who leaves the Shire, fights his way to Mordor, destroys the ring and returns as a changed being. Parallels to the classic heroic journey in CSR projects are not easy to draw. Nonetheless: in all CSR projects, there are conflicts for the heroes that are solved. The handicapped workers at the Taicang Sino-German Handicapped Workshop, for example. Their conflict is that they struggle to be a part of the community. They start with a disadvantage in the job market, train hard, and emerge as skilled workers.

4) Emotions

Whether joy, anger, grief, surprise, disgust or fear. Emotions are a strong driving force for many of our actions. Compassion is crucial to a story. Compassion for children with cancer or blood diseases certainly was a decisive reason for the employees of MANN+HUMMEL to act as volunteers at the Shanghai Children’s Medical Center. Emotions are not triggered by factual descriptions, but by emotions. Stories arouse emotions when they are visual, detailed and easy to grasp.

5) Viral

A good story is viral. It is shared. We retell a story when it has a reason to be told, when there is a hero we can identify with, when the story is about a conflict that needs to be solved, and finally when it touches us emotionally.)

These are the ingredients of good storytelling. Applied to telling the stories of CSR projects, they will certainly help to engage people. Engagement is what CSR projects need.

Further Information

Dr. Evelyn Engesser holds a PhD in journalism and has more than 20 years’ experience in communication consulting. She is head of UNICEPTA China, and co-author of the “Compendium of China’s Media Landscape.” UNICEPTA is a leading global provider of media and business intelligence services headquartered in Germany. Contact: evelyn.engesser(at)unicepta.com

Dr. Stefan Justl holds a PhD in Journalism. He has more than 20 years’ experience in brand management, marketing, advertising and storytelling for global market and technology leading companies. As business development director at Storymaker Public Relations he helps his customers create communication strategies with the right angle. Contact: s.justl(at)storymaker.cn

04 | 2017 | Health and Life Sciences

Foreword and full PDF

China’s “New Booming Industries”
by STEFAN ROSENBOHM

China has become one of the largest healthcare markets in the world but healthcare spending still only accounts for approximately 5.5% of the country’s GDP. With a growing consciousness among the population regarding health and healthcare, the Chinese government has issued a series of policies aimed at reforming the national healthcare system and establishing a safer and more stable system. On one hand China’s government encourages private capital investment into the so far mostly state-owned and operated healthcare industry. This has resulted in a steady growth in foreign invested, private hospitals that offer high quality services, a comfortable environment and more innovative approaches, when compared to public clinics.On the other hand, it also encourages local production of pharmaceutical products which poses a challenge for global players. Large multinational pharmaceutical companies have hence joint forces with local companies not only in production but also in R&D efforts to ensure faster product launches, easier product registration processes, lower costs, as well as more targeted products. In this edition of German Chamber Ticker, we will explore how other, seemingly “new” industries have recently become big pillars in the Chinese economy and what that might mean for society in general. We will also shed light on the growing pharmaceutical industry in China and the steps large multinational players in the industry have been taking to ensure their continued success in the country. Last but not least, we will take a closer look at the successes and fallbacks of digitalization in the healthcare industry and what the future of the industry could mean for tech companies. We hope you enjoy reading!

Download the PDF here

Cover Story 1 - A Place on the Global Field

The Emerging Sports Industry in China
by DONGFENG LIU

While only three to five years ago, many people would still question, if not laugh at, the idea that sport would be a serious industry in China. Today, they are much less likely to do so. Indeed, the past several years have witnessed massive investment into the sport industry in China. It is reported that Chinese mergers and acquisitions in domestic and overseas sports markets have seen exponential growth since 2015, when it spent almost RMB 40 billion (around USD 5.99 billion) in total investments was spent, with 33 deals valuing over RMB 10 million (around USD 1.50 million). Mr. Wang Jianlin and Mr. Jacky Ma, the two men who took turns to top China’s richest list, have been leading the way in investing in sport businesses with each splashing out billions of dollars on sport properties. The financial muscle of China’s top professional football league and their recent eyebrow-raising expenditure on player transfer now puts clubs across Europe on high alert. In short, the perception of the sports industry in China has changed from almost “nothing” into the “next big thing” over a relatively short period of time. So, what has led to this seemingly sudden investment fever in sports? Will China become the nouveau Eldorado of sport business?

Making Space for Sport in the Middle Kingdom

This rise of sport business in China has been widely attributed to the strong top- down government promotion with a series of high profile policies released from the central government. Among other things, a national strategic policy titled “Opinions on Accelerating the Development of Sports Industry and Promoting Sports Consumption” (the Decree hereafter), issued by China’s State Council on 20th October 2014, was widely cited as a milestone leading to the taking-off of sport business.

There is a bigger picture behind the birth of this policy document. Since the current new leadership took office in 2012, China has entered, in President Xi’s words, a stage of “new norm”, namely the double digit economic growth of the previous three decades is no longer sustainable. Faced with enormous challenge of economic slowdown and restructuring, the central government had to look to new areas of growth. Among other things, sports were singled out as one of these new growth points for its potential by referencing to the experiences of the developed economies. This is the first time that sports were recognized by the highest level of China’s government as an important industry sector. The Decree is also eye-catching enough with its ambitious goals and some concrete measures. It predicted that the Chinese sport business would develop into a market worth RMB 5 trillion (equivalent to approximately USD 815 billion), with an annual GVA of RMB 1.7 trillion or roughly between 1.2% and 1.5% of the national GDP by 2025. In addition, probably even more important, the Decree also promised to loosen the tight control over sport development by the government. So the market or private sector could now play an important part in meeting the growing demand for sport products.

Xi's Soccer Dreamy

Less than a half year later on 16th March 2015, the Decree was matched by another high profile strategic plan named the Overall Reform Plan to Boost the Development of Soccer in China (the Soccer Reform Plan hereafter). The Soccer Reform Plan was approved by China's central reform group, a core decision-making body chaired by President Xi Jinping aiming to deepen reform in the most significant areas of the country. While it’s no secret that President Xi is a soccer fan himself, there is a danger of oversimplifying to attribute a national strategy of China to its political leader’s personal hobby. In many ways, this Soccer Reform Plan can be seen as a follow-up plan to the previous Decree as a coherent strategy to promote sport development and industry. It is widely believed that the conflict between a planned system and a market-based professional, and commercial sport is the major obstacle to sport business development, particularly professional sports.

Unlike in the west, all sport governing bodies in China, such as China Football Association, are quasi-governmental organizations. Actually the 70 national sports associations exist in parallel with 23 sport management centers (governmental departments) controlled and managed by the same group of people. So while much media attention has been focused on the ambitious goal of China to become a soccer super power, the keyword “reform” should be highlighted. It promised that the centralized sports governing system should be deregulated and reformed to release the huge market potential of sport industry in China. The reason why soccer is singled out is partly because soccer is the most popular team sport, as well as one of the very few professionalized sports in China. Thus it is expected that the reform of soccer would not only help develop soccer and build a successful soccer industry, it is expected to serve as a pilot and model example for other sports to fall in steps. In addition, the Chinese government is of course well aware that soccer is not only a sport beloved by its own citizens, but also one that has global popularity and influence which is also highly intertwined with national pride. But the performance of the Chinese men’s national team and Chinese top flight professional soccer was so disappointing that very often Chinese fans had to turn to the European football leagues for quality products. Thus, the talk of becoming a soccer super power has also become a natural part of the “Chinese dream”, a narrative proposed by President Xi who has been trying to use his version of “Make China Great Again” as a promise to unite the country.

From Infancy to Sport Superpower

The timing and the signals sent out by these policies are also equally, if not more important. On the one hand, judging by all measures, sports industry in China is still in its infancy stage. The GVA of sport industry for 2013 in China was barely RMB 356 billion, accounting for 0.63% of national economy, while in contrast, the contribution of sport business to the national economy stands between 1.5-3% for the developed countries. In addition, almost 80% of sport industry in China comes from manufacturing and sales of sporting goods, while participation and spectator sports only account for less than 20%. On the other hand, a real growing demand for quality sports products which could not be met by the poor supply exists. Most of the core assets and properties of sport industry are in the hands of the government, which could not be easily accessed by the private sector. Thus these national sport strategies couldn’t come at a better time, and are warmly embraced by the market.

Despite all the challenges ahead, the growth rate of sport industry in China achieved an outstanding rate of 35.97% in 2015, outshining most other industry sectors. Without doubt, this robust growth alone would continue to attract the cash-rich and investment-hungry nouveau riche in China into this market. While we will witness the fall of many investors in the years to come, there will be surely many others who would be smart enough to tackle all the challenges to rise above in this promising industry. While the importance of these policy documents from the central government couldn’t be overstated, it would be naïve to say that the industry could be built with a handful of policies. Many of the challenges remain to be solved. In terms of sport administration system reform, the termination of the Chinese Football Administration Center, the former state-run governing body of football, was officially declared on 5th January 2017, putting an end to the lengthy process of the so-called “decoupling of the Chinese Football Association from government” which was stated in the Soccer Reform Plan. But whether the Chinese Football Association (CFA) can become a real autonomous governing body remains to be seen. The reform of football administration in its current form can hardly be interpreted as a deregulation of sport. The newly “elected” president of CFA is at the same time a vice minister of the Sport Ministry might have said it all. It is said that Mr. Gou Zhongwen, the new chief of China’s Sport Ministry, is reform-minded and determined to push the long overdue reform of sport administration forward. He was then very quick to have made the well-known remarks that “the water of sports is very deep,” implying the difficulty and complexity of sport reform ahead.

In addition, the sudden massive new capital poured into sport business over the past two to three years by the Chinese investors acquiring all kinds of sports properties, often at seemingly highly inflated prices, have led many people to believe that a bubble may be in the making. The recent financial crisis facing LeTV Sport seems to show that these worries are not totally unjustified. Once boasting the largest sports properties owner in China, LeTV spent billions of dollars buying sports broadcasting rights at jaw-dropping prices in a short period of time. But as the company failed to develop a successful business model to secure return on these investments. It now finds its money-burning approach is not sustainable and has just lost the media rights of both Chinese Super League and Asian Champions League it once proudly acquired. It is also widely acknowledged that the dearth of talents and expertise is another obstacle to the development of sports business in China, which to some degree is highly associated with the failures of some emerging players.

Despite all the challenges ahead, the growth rate of sport industry in China achieved an outstanding rate of 35.97% in 2015, outshining most other industry sectors. Without doubt, this robust growth alone would continue to attract the cash-rich and investment-hungry nouveau riche in China into this market. While we will witness the fall of many investors in the years to come, there will be surely many others who would be smart enough to tackle all the challenges to rise above in this promising industry.

Further information

Dr. Dongfeng Liu is a professor of sport management and co-dean from Shanghai University of Sport. He is also international professor with Bayreuth University and German Sport University. He has over 40 publications including books and refereed journals articles. He could be reached by email at donalddf(at)hotmail.com.

Cover Story 2 - Healthcare in China

Huge Market, Strong R&D
by RICHARD DENG, HAIBO WU, AND THUM WANG

Driven by economic growth, 20 years of urbanization, and an increasing aging population, China has become one of the largest healthcare markets in the world. Data released by the Chinese Academy of Medical Sciences show that healthcare spending in China reached EUR 554 billion in 2016, accounting for 5.66% of GDP in comparison with a high-income country average of 7.7%. It is expected that the health expenditure will reach EUR 882 billion by 2020, according to National Health and Family Planning Commission (NHFPC), China. Considering the increasing R&D capabilities and improving framework conditions for science, technology and innovation (STI), China is not just a huge market for healthcare business, but also a strong partner for R&D activities.

Healthcare Services and Pharmaceuticals

Since 2009, the national health policy underwent an extensive reform aiming to establish a basic, universal healthcare system that can provide safe, effective, convenient, and low-cost services to citizens by 2020. This year, China will continue to expand the reform, especially the public hospital system which is one of the most challenging aspects among the health reform in China.

The government tries to promote tiered diagnosis and treatment on a national scale, as public hospitals provide 90% of healthcare services with quality talents and medical resources while they are still not enough in response to the demands from the huge population. Multiple rounds of price cuts for drug purchase (“zero mark-up” policy to limit drug revenue) and hard reimbursement caps for hospitals and DRGs (Diagnosis-related Groups) are also tested and adopted step by step in public hospitals to reduce their reliance on pharmaceutical revenue and increased service charges and fees for other technical services.

Chinese private hospitals, mainly invested by investors from the United States, Japan, Hong Kong, Macao, and Taiwan, although remain a minor player in the Chinese healthcare system and complement public hospitals, are gradually growing due to the new policies that encourage private capital investment into the healthcare sector published in 2013 (not obligated to have a joint venture with local Chinese partners as required in the past). A new hospital, invested by Artemed and located in the Pilot Free Trade Zone (Shanghai), is expected to operate next year. The new hospital will not just focus on the high-end customers but also ordinary people by integrating Chinese national healthcare insurance system. In the next ten years, private hospitals will compete with or even surpass public hospitals in a few service areas by high quality, innovative products and optimized services. On the other hand, the development of the private hospitals may force the public hospitals to improve efficiency and enhance service quality by further reform.

Chinese pharmaceutical industry has been growing steadily in recent years. In 2016, Chinese pharmaceutical industrial value-added increased by 10.4% which ranked the top one in the total 12 industries. It is expected that by 2020, the total market value will reach EUR 280 billion according to Global Data. But the R&D investment of the more than 5,000 Chinese enterprises is quite limited (less than 10% of the turnover for some large companies) compared with international players. Even quite a lot of funding scheme are available to support R&D activities at both national and regional level.

Regulatory related issues, especially registration and clinical trials remain one of the barriers for foreign companies. For drug produced in European countries and imported to China, it must be registered through the China Food and Drug Administration (CFDA), the Chinese authority that is responsible for supervision and management of the drug registration and production. For drugs that are still in the clinical development stage, the company must apply for international multi-centered clinical trial in China plus at least one more country. For the original drug or generic drug which has already been approved in Europe, the company must submit completed clinical trial data and other relevant documents with emphasis of innovation and enough data for original drug and dissolution study and bioequivalence study for generic drug. In total, it may take two to four years to complete the whole process. Herbal medicines are more difficult to register in China as the CFDA has higher standard requirements in regard to the ingredients.

The foreign pharmaceutical companies enjoyed more than ten years of “golden times” in the Chinese market and now they face challenges of market price going down due to the new policy from the government. From 2015, the Chinese government initiated the “Drug Price Negotiation” strategy to force the foreign pharmaceutical companies to cut down prices through a public bidding process, which brought significant impact on these foreign companies. Furthermore, the local Chinese companies produce cheaper generic drugs, taking advantage of more than 600 patents of the original drug that were expired in the past five years. Foreign pharmaceutical companies are looking at new business models for further growth in the Chinese market to expand into the fast- growing OCT market. Increasing the sale volume by bringing the products into the Chinese National Reimbursement Drug List with lower price and approaching hospitals located in the third or fourth tier cities may also help to keep market share. Additionally, further localization by close partnerships with Chinese companies through outsourcing distribution, is also an option to cut down operational cost overall.

From the China side, the Chinese government invested a lot in innovative drug development (for example, drugs to control of viral hepatitis and other infectious diseases). Partnerships between foreign multinational companies and local Chinese companies on R&D activities are encouraged in order to enhance R&D capabilities in the Chinese pharmaceutical industry and foster higher levels of innovation activities to be competitive in the long term.

For foreign multinational companies (MNCs), joint research projects on the new drug development or licensing IP with Chinese research institutes and companies may share the risks and costs with Chinese partners. In addition, it may be helpful for MNCs to concentrate on R&D activities for the high value-added products targeting premium market segments. For foreign SMEs, particularly SMEs with innovative technologies of bio- medicine, they could leverage different national and regional Chinese funding programs by partnering with Chinese counterparts to finance R&D activities and commercialize the products into the Chinese market. Although the Chinese government realized that the enforcement of IP protection will provide a better environment to benefit both sides, both MNCs and SMEs need to keep a close eye on IP issues and monitor the patent status of similar products. It is also very important to select the right partners ensuring both parties have similar understanding and common strategy on IP and other key issues.

EU-China S&T Cooperation in Healthcare

China is one of the EU’s key international partners in research and innovation. In the 7th Research Framework Programme (FP7), 383 Chinese entities participated in 274 projects with total budget of EUR 35.24 million contributed by the EU. This ranked third among international partner countries by number of participations and fourth by budget share. Healthcare is one of the six top areas. Chinese applicants are involved 418 times in 213 eligible proposals with a success rate of 16% (as compared to 15.5% for non-associated countries and 12.7% overall) in Horizon 2020, the new European research and innovation program, according to data from DG Research and Innovation, European Commission.

To further encourage Chinese participation of Horizon 2020, the European Commission and the Chinese Government set up a Co-Funding Mechanism (CFM) on research and innovation to support joint projects within Horizon 2020 in 2015. Under the CFM, up to RMB 200 million (around EUR 28 million), is made available annually by the Ministry of Sciences & Technologies for China-based entities that participate in joint projects with European partners under Horizon 2020. The European Commission expects to continue spending over EUR 100 million per year for the benefit of Europe-based entities in joint projects with Chinese participants under Horizon 2020.

Joint research projects in the healthcare sector between the EU and China are conducted both in the context of FP7 and Horizon 2020 with focus on rare diseases (within the International Rare Diseases Research Consortium, IRDiRC) and chronic diseases (in the frame of the Global Alliance for Chronic Diseases, GACD). Research cooperation on infectious diseases and traumatic brain injuries might be strengthened in the context of the global tuberculosis vaccine or traumatic brain injury. The cooperation is helpful for both the EU and China to address the increasing prevalence of chronic diseases, aging population, as well as other global human health challenges.

For example, CHETCH (www.chetch.eu), a project funded within the FP7, with participation of many Chinese universities, aims to provide a comprehensive study overview on the EU-China cooperation in healthcare from multi-perspectives (medical, legal, economic, and humanities). The final conference of CHETCH was held on 12th July 2017 in Nanjing, China. The main findings of the project in the healthcare sector between the EU and China were presented at the conference.

In the 3rd EU-China Innovation Cooperation Dialogue in June 2017, held in Brussels, the European Union and China agreed to further boost research and innovation cooperation with a new package of flagship initiatives targeting multi-areas including biotechnologies for environment and human health. These flagship initiatives are to be translated into funding opportunities within the 2018-2020 Work Programme. Both parties also agreed to renew the Co-funding Mechanism for the period between 2018- 2020 to support collaborative research and innovation projects under joint flagship initiatives and other areas.

A very interesting project – ERICENA - European Research and Innovation Centre of Excellence in China, led by Sociedade Portuguesa de Inovação (SPI), was particularly mentioned in the final signed joint conclusions of the 3rd EU-China Innovation Cooperation Dialogue. The project was funded by the European Commission within Horizon 2020 and aims to create a Centre of Excellence to promote European Science, Technology and Innovation (STI) interests and to reinforce the leadership of European countries in STI in China. The China side welcomed the new project ERICENA with the participation of Chinese stakeholders. The Centre will be officially launched in October in Beijing and start offer services to European innovators in different sectors including healthcare. European healthcare companies and researchers that are looking for R&D partnerships with China could contact ERICENA for support.

Further Information

Richard Deng, Chief Representative, Sociedade Portuguesa de Inovação (SPI), China richarddeng(at)spi-china.cn.

SPI Description: SPI (www.spieurope.eu) is a private consulting company created in 1996 as an active center of national and international networks connected to the research and innovation sectors. SPI has more than 75 full-time staff located in various offices in Portugal, Spain, China, USA and with an affiliated office in Belgium (Brussels) through the EBN.

Haibo Wu, general manager, Giant Med-Pharma Service Group wuhaibo(at)giantcro.com.

Thum Wang, director of registration affairs, Giant Med-Pharma Service Group wangxiao(at)giantcro.com.

Giant Med-Pharma Service Group is a professional Contract Research Organization (CRO) that provides support to the pharmaceutical and biotechnology companies on registration and clinical trial.

Cover Story 3 - Dissecting Digital Health

Redefning the Value of E-Health
by TOBY OVERMAAT

The State of Healthcare in China

The most recent estimation of China’s healthcare expenditures amounted to a mere 5.4% of GDP, in contrast with 17.1% in the USA. Based on this fact and the sheer size of the Chinese population, one could argue that this is one of the most efficient healthcare systems in the world. More specifically, China has a chronic disease patient population exceeding 300 million. The immense amount of pharmaceutical prescriptions and frequent hospital visits means huge patient throughput, which also results in significant pressure on China's healthcare system.

Pressure must be released somehow, as is apparent whenever one visits top-tier hospitals in large Chinese cities. For a doctor to see 200 patients per day is a typical phenomenon; Each patient is left no more than two to three minutes to describe their symptoms, receive their prescription, and ask questions. In many hospitals, it is a ten-minute wait just to enter the lift. Violent encounters between doctors and patients are relatively common. A few years ago, while the author was doing research for medical devices at a hospital in Harbin, one doctor commented that he hoped his son “would never be so unfortunate as to study medicine.”

The cause of these pains can be described by the numbers 3, 2, 1. These numbers refer to the class of the hospitals (and to a certain extent, the tiers of the cities). Class 3 hospitals (especially those in the tier 1 cities) are the national centers of excellence, where advanced medicine in practiced. Class 1 hospitals are the community centers, focused on standard prescriptions and minor health complaints. A Class 3 hospital in a large city is typically bursting at the seams, whereas the Class 2 and 1 hospitals have no patients to be seen. In summary, the best Class 3 hospitals attract the best doctors, which then attract all of the patients. It is common to visit a Class 3 hospital if one has a cold or flu. When it comes to health, everyone just wants the best.    

The internet of Health

As the country ages and disease incidence increases rapidly, the government has been actively pushing towards a new system of healthcare. The introduction of these new policies gives the hospitals direction, and harnesses the enthusiasm of the private sector. Briefly speaking, the government supported reforms include: 

  • Adjusting insurance co-pay to incentivize patients towards the lower tier hospitals
  • Promoting a primary care system for minor sicknesses (house doctor system)
  • Intending to release doctors from hospitals (multiple-location practice)
  • Supporting continuous digitalization of hospital systems and processes
  • Emphasizing chronic disease and patient management

These policies have the common goal of balancing the unequal distribution of resources, as well as attempting to control the ballooning costs of chronic disease (which take up around 70% of the total healthcare costs). Besides these initiatives, in 2014/2015 the government released a policy focused on healthcare, called "internet + health," as a subset of its "internet+" push to digitalize the country’s traditional corporations. As a result, an entirely new industry, called “mobile health,” was kick-started, and huge investment amounts were suddenly being thrown into thousands of new mobile/digital healthcare ventures and projects.

The Startup and the Hospital

Previously, the healthcare industry operated mostly unaware of the internet and technology buzz. However, the government’s "internet + health" movement gave startups and companies the motivation to find ways to actively emulate and integrate into the healthcare system. The most common technology partnerships involved the digitalization of the hospital registration and payment process by larger players like Alibaba and WeChat. Currently, at many hospitals, one can register for consultation through a WeChat account, pay one’s fees, and in some cases even have medicines delivered to directly to one’s home. In the immediate future, much of the waiting and post-consultation process will be shifted online.

The side effect of the internet+health movement was that doctors and nurses suddenly became even more popular than usual, with multiple new startups harassing them and paying small fees in exchange for app installations. Large companies joined in the craze, with existing internet companies, pharma or device manufacturers, and even insurance companies developing large doctor social networks and providing patients with free 24/7 consultations. Many doctors and some hospitals were embracing the new technologies—For a while, at least.

Through rising and falling the tide of mobile healthcare initiatives, certain user behaviors have shifted while most others have remained unchanged. In contrast to how the offline retail and F&B industry has been utterly transformed by mobile payments, the healthcare industry in most cases has only been marginally disrupted. Most applications on doctors’ phones now remain untouched or uninstalled.

Hype and Disappointment

The government policies and significant venture funding have provided huge impetus for the digital health industry. But, healthcare involves complex systems, incentives, and regulation, that makes it inherently difficult to disrupt, in comparison with consumer facing businesses.

One could conclude that the internet+health movement has fallen short of its initial promises, and some of the reasons for this can be enumerated as follows:

  • Many digital health solutions intend to solve only non-essential user needs. For example, platforms that focus on helping doctors manage their patients outside of the hospital system, which is not typically a main concern for doctors.
  • Solutions that require user behavior to be changed, that require more effort than gains from the service. For example, diabetes self-management applications that require already lazy patients to input large amounts of data.
  • Many startups continue to play on the periphery of the hospital system, afraid to enter the domain of the hospital. For example, some startups focus on answering patient questions online, but doctors cannot prescribe or diagnose online, providing the patient with little clinical value.
  • Some startups base their value proposition on utilizing public resources (i.e. doctor, nurse time), which is already constrained. On some online consultation sites, only intern doctors have time to answer patient questions. 
  • A well-defined business model is challenging to find in digital healthcare. With a doctor population of (only) 2.5 million, purely doctor facing services are difficult to monetize. Eventually, either the patient, the insurance, or big pharma must foot the bill.

Data Talks: A New Model for Healthcare Innovation

Despite the challenges, significant opportunities for innovation and entrepreneurship in healthcare remain. Whereas digital health in China in the past few years has focused on improving system efficiencies, real healthcare innovation should instead be focused on improving patient outcomes. The medical industry exists for one main reason: to improve lives of patients. Therefore, solutions that do not address patient needs directly are doomed to live on the periphery of healthcare, as mere supporting tools in a system that can survive without them.

The healthcare system involves multiple large players, including both private and public healthcare institutions, medical corporations, and private and public insurance. Even within these organizations, the incentives and user needs differ between the various healthcare practitioner roles. So, the challenge for the smaller players is to figure out where in this ecosystem that they can provide value. Finding a unique value proposition within this ecosystem is challenging, and it is tempting to fall into the trap of being a pure outsource or software development company.

Clearly, digitally-focused startups have a technology advantage that can help healthcare institutions become more efficient or improve their services, and these advantages can result in new business or service models. But, the more interesting opportunity lies rather in using this technology capability to improve treatment or prevention outcomes.

As healthcare data becomes even more digitalized, and insight into the patient’s health is quantified through genetics, continuous measurement, and other technologies, our society continues to generate significant amounts of health data. All these untapped resources are waiting to be aggregated and analyzed. Data-driven diagnosis and decision making have already begun to make an appearance in hospitals, with the treatment of cancer leading the drive. In the past, patients with the same cancer types received similar treatment regimens. With the introduction of sequencing, each tumors’ unique set of mutations is directly examinable, and many patients would benefit from a targeted treatment protocol. The general concept of this methodology is usually called “personalized medicine,” which in essence can be described as: 1) Measuring the clinical data (i.e. genomics), 2) Analyzing and making sense of the data, and 3) Applying the targeted treatments.

It is likely the future of the hospital will not just be a connected hospital, but a hospital assisted by computers: assisted diagnosis, biomarker analysis, treatment prediction, risk stratification, etc. Doctors of the future are likely to have more algorithms assisting them rather than interns. This is where technology companies have a unique opportunity to provide value.

Further Information

Toby Overmaat is CEO and Co-founder of Zhihui Health Technology, a bioinformatics company that develops disease diagnostic solutions through advanced analysis of genomics data. She previously worked at IDEO, TSMC and Morgan Stanley, with an MBA from CEIBS and MSc. in EE from Imperial College. You can contact her at toby(at)zhmed.cn.

Cover Story 4 - Healthcare Reform in a New Era

Challenges for MPCs and How to Overcome Them
by YVONNE WU, ANDREW YU, AND JENS EWERT 

The pharmaceutical industry, by China's 13th Five Year Plan, is considered to be a pillar industry that will fuel economic growth in the future. It is expected to maintain medium to high growth rates due to increasing medical demand. At the same time, with a slower growing domestic economy and deep reforms into China's social protection system, Beijing has been focused on medical cost control through a policy mix that includes tendering and medical insurance, which encourages usage of cheaper domestically-produced drugs over higher-priced imported ones. As a result, multinational pharmaceutical companies (MPCs) will face a more challenging environment going forward, described in greater detail hereafter.

Growth of MPCs’ Sales in China has Slowed Down

MPCs have experienced a less robust sales growth in China. According to data from QuintilesIMS, the total sales volume of MPCs from hospitals (with more than 100 beds) grew at the rate of 4.5% in 2015 and 8.5% in 2016, while the growth rates in 2013 and 2014 were 11.5% and 12.2% respectively. Furthermore, only three MPCs performed better than the average growth rate of all the domestic and multinational companies (8.1%) in 2016.

Brand-name Drugs Losing the Advantage of High Premium

MPCs’ profits are mainly generated by their brand-name drugs (i.e. imported drugs whose patent protection periods in many cases have actually expired), which are being sold at premium prices. The Chinese government introduced several measures, trying to reduce drug prices and resulting in downward pressure on brand-name drugs’ profit margins. Some of these measures include a rigorous bidding process, as well as the launch of a generic drugs consistency evaluation with these processes, generic drugs that have passed the evaluation can theoretically take part in the bidding process alongside brand-name drugs.

“Trade Price for Market” Negotiations Have Failed to Achieve Desired Results

In addition to a centralized procurement process, the government has organized national price negotiations with regard to certain brand- name drugs. In May 2016, the National Health and Family Planning Commission announced the results of the first series of national drug price negotiations, resulting into prices reduction for products such as Tenofovir Disoproxil, Ekotinib, and Gefitinib.

However, during the implementation process, achieving a “trade price for market” turned out to be more difficult than expected. One of the hindering elements includes the differentiated management structures over the healthcare insurance system, which make it difficult to agree on drug prices and the health insurance system. The other reason resides in the fundraising capacity of health service providers, which varies from province to province.

Looming Trend Towards Replacement of Imported Drugs with Domestic Drugs

On the back of stricter cost controls, many regions/provinces are encouraging the use of cheaper, domestically-produced generic drugs over imported brand-name or generic drugs.

In May 2015, the Government published the “Guiding Opinions on Urban Public Hospital Comprehensive Reform Pilot”, with the aim of lowering the percentage of medicine sales in revenues of pilot public city-level hospitals to around 30% by 2017. This measure will have a significant impact on sales of imported drugs that are sold at premium prices.

On the other hand, the scope of the implemented reform of the payment method, i.e. payment according to DRGs (Diagnosis Related Groups), is expanding. This new payment method will effectively restrain hospitals from prescribing more expensive medicine, thus encouraging medical institutions to use domestic products with similar curative effects, but lower prices.

Operating Pressure Pushes Pharmaceutical Companies to Adjust Their Business Arrangements

As a response to the government policies, a few MPCs have started reviewing their current product portfolio by reinforcing and strengthening competitive products while selling or reducing weaker internal product lines.

Such strategic resetting of product portfolios and allocation of internal resources is demonstrated through certain transfers or collaboration models with domestic companies initiated by MPCs over the past few months.

Finally, compliance focused, MPCs are feeling the same as their domestic counterparts because of increased regulations. As per a December 2016 CCTV report about recent marketing compliance issues, Chinese doctors receiving kickbacks have led to tighter regulations. Thus, compliance and risk management in the healthcare sector will remain a major focus.

Conducting Localized Production and R&D

In order to reduce production costs, better serve China’s market demand, and reduce the time to market for new medicines, MPCs are considering to switch from an import-oriented to a local-oriented business model.

Localizing brand-name drugs production brings further advantages, such as an increased reaction time to local markets, the possibility to win over favorable bidding policies, and the opportunity to develop and expand local markets.

Then, quite a few MPCs have also established wide ranging and sophisticated research centers in China, such as Novo Nordisk, Roche, Pfizer, Johnson & Johnson, AstraZeneca, and GlaxoSmithKline.

Due to differences of ethnicity and disease spectrum, developing new drugs specifically for the Chinese market becomes increasingly crucial. Also, conducting R&D in China helps accelerate the launch process of new drugs in China and, at the same time, extends the earning cycle of a drug.

Some MPCs are making use of local talents by cooperating with local pharmaceutical companies rather than establishing their own local research centers. For instance, innovative and research-driven local companies may take over MPCs' early-stage projects and conduct further localized development that are tailored to the needs of Chinese patients.

Medicine Market Arrangement at the Grassroots Level

In recent years, government support and investment have led to abundant opportunities in county and community-level hospitals and other grassroots markets. According to data from QuintilesIMS, the grassroots pharmaceutical market has great development potential, as the drug sales in community hospitals will rise rapidly at a rate of 18%, with a growth rate higher than at level 2 and level 3 class hospitals. With the implementation of hierarchical diagnosis and treatment, the integration of new rural cooperative medical systems with urban resident basic health insurances, and stricter cost control policies implemented by major hospitals, a medicine market move towards the grassroots level is inevitable.

Under this context, MPCs may consider arranging their business towards the grassroots, including county-level hospitals, community health service centers and retailers. However, it is worth noting that due to regional and demographic factors, the county-level markets face a low ratio of market investment to medicine sales volume – an issue that MPCs need to overcome. Moreover, since mainly domestic pharmaceutical companies, whose medicine structure primarily focuses on essential medicines, dominate the grassroots markets, opportunities also exist for MPCs, adopting new strategies to face the high-volume but low-margin bottom markets.

In this regard, MPCs need to have an overall understanding of the particularity of each market when choosing their targets. They may prioritize grassroots markets with a more advanced economy, higher population density, and better development potentials. Moreover, an adjustment of their marketing model should be considered. Instead of solely relying on sales representatives visiting clients, companies may consider more effective and economic methods.

Thus, pharmaceutical companies need to enhance their marketing personnel training, turning them into sales representatives covering the entire product catalog. At the same time, they may use digital channels, medical personnel, interactive seminars and trainings to encourage doctors to participate in conversation.

Exploring New Business Models and Overall Solutions

With patients focusing strictly on curative effects of the drugs, MPCs may explore new business models that provide overall health solutions for patients. Such new business models should allow MPCs to differentiate themselves from competitors, ensuring consumer “stickiness” and enabling growth in the long term.

Among various new business models, many MPCs applied the so-called “Internet+” model.

As the medical internet wave is spreading across the world, “Internet+” brings various advantages to MPCs, including information dissemination among doctors – offsetting the weakness of marketing coverage –, improved communication between doctors and patients, as well as the implementation of disease management platforms to increase patient stickiness.

“Internet+” that allowed a chronic disease management made cooperation between MPCs and mobile medical companies essential. The main reason for this trend is that in the domain of chronic diseases, such as vascular diseases, diabetes, central nervous system diseases, etc., patients are reliant on long-term and high frequent monitoring and caretaking. Using mobile medical companies’ technologies, allows MPCs to improve the curative effect of drugs and patient medication adherence.

As the healthcare reform progresses, MPCs are facing an increasingly challenging environment. Cost control measures will make it much more difficult for MPCs to keep their overall margin at the current level.

Yet, there is room for MPCs to grow in China's market. A market with the greatest growth potential in the world, and perhaps the biggest market that is yet to be developed. If MPCs achieve in adapting to China’s policies, a market trends, and reconstruct their strategies accordingly, they will still be able to seize market opportunities and develop new competitive advantages.

Further Information

Yvonne Wu is Deloitte China Life Sciences and Healthcare Industry National Leader. yvwu(at)deloitte.com.cn.

Andrew Yu is Deloitte China Life Sciences and Healthcare Industry Consulting Partner. andryu(at)deloitte.com.cn.

Jens Ewert is Deloitte China Multinational Clients Partner. jensewert(at)deloitte.com.cn.

About Deloitte China: The Deloitte brand first came to China in 1917 when a Deloitte office was opened in Shanghai. Now the Deloitte China network of firms, backed by the global Deloitte network, deliver a full range of audit, tax, consulting and financial advisory services to local, multinational and growth enterprise clients in China.

Cover Story 5 - Going with the Change, Getting Ahead of the Wave

Interview with Steve Vermant about Life Sciences in China and What to Expect of the Industry’s Future
by OLIVIA HELVADJIAN and JESSICA DOWNER

The German Chamber Ticker team had the opportunity to talk to Mr. Steve Vermant Managing Director & Head of Research & Applied Solutions, Merck Life Science, China. Mr. Vermant has over 20 years of global experience in life sciences and talked about where China will be headed to in this industry.

What changes have you seen in the last few years in China, business wise?

China has undergone massive changes in the last few years. I have seen a move from a supply-based approach to an innovation-based approach. From a life science perspective, the China government is investing and pushing for innovation by increasing their research & development spend, filing for patents and training scientists.

The food and environmental quality in China has also improved tremendously, especially with the implementation of stringent guidelines. Merck is privileged to have the opportunity to support and work with the government institutions in these areas.

What are the market trends and opportunities for the life science industry in China?

The life science industry is an exciting industry to be in.

When we look at the overall business, we see the driver being in Biosimilar and novel monoclonal molecule, where we have our disposables business. In the Applied segment, we see growth from the increase in food and environmental standards. Our research business has also grown well from a demand perspective as a result of government support for domestic biopharma research and development. Overall, Merck grew to double digits in the past year.

The Chinese government has mapped out the 13th Five Year Plan and in it, you will see that food and environmental safety are highlighted. These are areas which Merck is playing an active role and has done well in. We are a leading supplier for lab water purification, diagnostic products, food and safety, and bio-monitoring.

China is an important market and it is a top five market, with strong growth and opportunities. Merck has invested close to EUR 250 million in China. The most recent was the investment to build a life science manufacturing site in Nantong, demonstrating our commitment to China. 

With the growing need for innovation globally, the mindset of the talents in China has evolved to adapt to this change. Chinese people are keenly interested in developing new products, and in learning how to run a global business. In recent years, many who were based abroad have returned to China and they are eager to make an impact. China is progressing massively on numerous fronts, and this is definitely very exciting. 

As a foreign company in China, what do you think of China's recent reform of the pharmaceutical market?

Overall, I think the reform of China’s pharmaceutical market indicates is a positive signal.

The recent changes made in China’s clinical and regulatory review and approval system reflect clear improvement in the policy environment. Together with China Food and Drug Administration's (CFDA) regulatory reform, these changes and reforms include encouraging innovation, building up review capabilities, and improving review efficiency and drug quality. They are an integral part of building a holistic eco-system of drug innovation.

The policy changes are aimed at strengthening the transition towards a patient-centric healthcare system that focuses on patients' well-being and the accessibility of health services. All of these are also in line with China’s 13th five year plan’s strategy to pursue innovation-driven development.

Most recently, the CFDA has become a member of International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use, indicating the move towards harmonization of global regulation. We are excited to see that it will now be much easier for Chinese drugs to enter the international market and for international drugs to enter into the Chinese market. 

China is regarded as the world’s largest as well as the fastest growing e-commerce market for the moment, what opportunities and challenges does Merck see in the e-commerce market in China? How about life science in particular?

Merck is a leading science and technology company. Digitization and innovation are crucial for us and an important source of growth.

Innovation is a key contributor in our ability to deliver our promise of accelerating access to health for people everywhere. We measure innovation by the volume and quality of our product launches resulting from investment in research & development. We launch thousands of products every year, from antibodies to water purification systems.

The integration with Sigma-Aldrich also allowed us to strengthen our capabilities in a number of areas. One key area is information technology, a strong suit for Sigma-Aldrich, an industry-leading e-commerce platform, where customers can search and purchase products in just two clicks, and have products delivered whenever and wherever they need. We want to extend this digital experience to the rest of our product portfolios. To achieve this, we are improving the back-end system of the online platform.

Our in-house digitization team is actively working with the local government and partners to ensure faster delivery to our customers by optimizing distribution. 

In summary, what is the outlook for life science industry in China in the coming years? What do you think are the key elements for a foreign company if they want to achieve success in the long-term in China?

Merck is in it for the long run. As such, it is important to understand how we can make a lasting contribution not just for this generation but for generations to come.

When I look at the future of the life science industry in China, it is very promising. With urbanization and an increasingly aging population, I see a greater need for healthcare, and for more stringent food safety and quality control. When there’s a greater demand for medicine, that’s where biosimilars and biologics are crucial. Merck Life Science is excited about the opportunities ahead and how Merck can play a role in elevating China’s life science industry.

From the healthcare perspective, cancer rates in China over the past ten years have increase twice as much, compared to the U.S.. The five-year survival rate of cancer patients is less than half compared to the U.S. If we are able to develop medicines that prolong lives, we will theoretically be able to double the number of cancer survivors who make the five-year mark to 2.8 million!

In terms of building the innovation culture and scientist pool in China, the government is looking at attracting 1,000 scientists from the top 100 institutions globally by funding their research work. Again, this is a fantastic opportunity and move towards advancing science in China.

In sum, with a focus on digitalization coupled with the right talent and product portfolio, I am confident that we are in the right position to collaborate with researchers to accelerate life science in China.

Mr. Vermant, thank you for your time!

In the Spotlight - Be Global, Be Local, and Be Open

Interview with Dr. Peter Mertens, Head of Research, Siemens Corporate Technology China
by SEBASTIAN SUCIU and JANA KUMPF

As a highly innovative company, Siemens aims to be a pioneer in technology development. For decades, Siemens has been increasing R&D investments in China. Meanwhile, China has become one of the most important R&D bases for the company. By fiscal year 2016, Siemens had over 4,500 R&D researchers and engineers, 20 R&D hubs and more than 11,000 active patents and patent applications in China. Siemens has become an integral part of the Chinese economy and is partnering with the country to address its pursuit of sustainable development. To further strengthen its power of innovation, Siemens is planning to increase its global investments in R&D in fiscal 2017 by some EUR 300 million to around EUR 5 billion.

Dr. Peter Mertens is Head of Research at Siemens Corporate Technology China and responsible for twelve groups doing research on digitalization, automation, energy, materials and electronics. Joining Siemens in 1991, he has over 25 years of experience in innovation management and R&D project management. After leading a project on light rail development in the United States, he became head of Corporate Technology at Siemens Japan. During this time, he was appointed specially assigned professor at one of the top five ranked science and technology universities in Japan. Over his career, he has worked on topics as diverse as robotic aides in elderly care, database and intelligent algorithms for requirements management, and the impact of demographic change on companies. Currently, he is also heading the Siemens China Innovation Center Digitalization Center of Competence, with five major projects including industrial data analytics, internet of things and IT security.

Dr. Mertens, having lived and worked in Germany, the US, and Japan, what brought you to China?

It was my personal motivation to come to China and to experience this working environment. I already knew a few colleagues here from previous assignments and I was sure that we had a strong team in Beijing. Most of the research group leaders in our team have been working for Siemens for ten years or longer and we have a 30% PhD ratio among our employees in R&D. Hence, the capabilities as well as the experience of my employees is very profound and I knew that with this team we can have a large impact on the company.

How do you assess the innovative environment in China?

The most obvious is the enthusiasm of the people for technology, for example the use of mobile devices and the adaption to mobility. Therefore, the approach on innovation topics in China is different than, let’s say, in Germany. In Germany, we need more time to assess and plan before money is spent. In China, however, the approach is much faster and more flexible. New ideas are tested and adapted with a different pace. In today’s digitalized world, you cannot really plan all the applications on paper and expect them to work, so trial and error is part of the whole process. The flexibility and the adaption to new things is a huge strength in China.

Also, the big Chinese tech companies are on a very high level of sophistication right now. Comparing how, for example, Baidu is using artificial intelligence, there is no big difference between them and the US-American companies.

What are the key factors to promote innovation in a corporate environment?

People are really key, but it’s not only the technical capabilities of people. We have studied this for Siemens internally. What enables us to do good innovation? We use a very simple explanation for what innovation is in contrast to invention: Invention of technology is taking money and creating knowledge. Innovation is taking the knowledge and creating business from it. All these top people and top PhDs are very good in creating knowledge and technology. What we have to add is getting this knowledge into the market. Hence, you have to know the market, you have to have a network from the innovation or technology people to the business people. And then you have to create a sense of trust that you can actually do it. You need the backing of top-level management for the funding, but also to have a certain amount of time, as you cannot do an innovation in three months. You need trust, freedom and a time frame of two or three years in order to prove that it works.

China has rolled out the Made in China 2025 strategy to comprehensively upgrade Chinese industry and Industry 4.0 is widely perceived in China. How do you assess the automation and digitalization level in China and how will this develop in the future?

China, Germany and Japan are all in the top 10 world economies with a large share of the economy in manufacturing. This is serving these countries very well as they have high employment rates, high level and high paying jobs in the manufacturing environment. Industry 4.0 focuses very much on getting IT technology into manufacturing. China 2025 is a little broader. The aspect of Industry 4.0 is part of it, but China 2025 also focuses on certain industries like trains or aerospace. So, there is kind of a natural connection that we can help each other. Secondly, the current capabilities of Chinese industry are very diverse. The major automotive companies have achieved an international level, while many other industries have a changing output and do not or cannot use the old way of automation so much and are still largely based on labor. Of course, we are targeting both kinds of industries as customers. A lot of big companies are key customers especially for automation equipment, but we are also thinking about how to help the smaller companies who don’t have that level yet.

According to the German Chamber’s last Business Confidence survey, 35% of German companies in China think it likely that Chinese competitors can become innovation leaders in their respective industries within the next five years. What are your thoughts on this?

It will be a mistake to think that Chinese companies cannot get to this level. Tencent or Baidu have achieved a similar level as their American competitors. A few other companies will achieve this international level. I don’t want to speculate about the percentage or the time they need, but it means that the whole market will be more mature. We would not only look at the competition part, but we also look at the opportunity progress. We have more mature customers who need our equipment, and will be able to forward the more sophisticated, expensive equipment. It would not be a problem for us as long as the playing field is leveled. If we can have reliable protection of our IP and if we are guaranteed that there is no protectionism involved, we would be very comfortable to work in a mature market.

From your point of view, are we on the verge of the next industrial revolution or is technological innovation a continuous process?

After mechanization, the conveyor belt and electronics and computer control in manufacturing, we are going through the fourth industrial revolution now. All of them required quite a bit of investment into the factory which takes some time. In political revolutions like the French revolution, you can often point to one day like the storming of the Bastille. Industrial revolutions may look like revolutions in hindsight, but to the people at the time it probably felt more like a continuous process. After some time, there was no more hand weaving due to mechanization. There were some revolutionary experiences like mass layoffs in the first revolution. However, the second and third revolutions were more continuous processes, so I feel that there is a revolution today as well. The industry will look very different after it is finished, but while we live through it – these 10 or 20 years – it will feel more continuous.

What are the biggest challenges of digitalization and automation?

In our experience, the biggest challenge is the talent side. We have a very strong and experienced team. The digital revolution means that we focus more on digital topics like big data, artificial intelligence, IT security, the internet of things and mobility. To strengthen our competencies in these five areas, we have hired 190 people in the last two years. However, the talent acquisition is really not so easy. China is a very big market and there are good universities, especially in Beijing and Shanghai, which is why our traditional headquarters of Corporate Technology are here. There are enough good people, but we also have a lot of competition. We want to use data scientists in manufacturing, but for example Baidu and all the internet companies want to use them in consumer products. This means we are not only competing with other industrial companies as our typical competitors, but also with the internet giants. This makes the talent market very tight and expensive. That is one of the reasons that we chose Suzhou as our third large Corporate Technology location, to tap into the talent pool there.

How is digitalization changing our economy and society?

I think in public and in private life it has mostly already happened. In the private area, today many things are already very far advanced, e.g. music streaming, online shopping and doing banking with your mobile phone.

Considering my work life, how the day is structured compared to twenty years ago, there is actually not much difference. I use a lot of IT to talk with my colleagues in other cities in China or Germany and we have lots of video conferences. The productivity is much higher, but the time I spend in the office, in meetings and for traveling is very similar to earlier. As an example on productivity: I remember the concept of paperless office from my first years at Siemens, and it finally came into reality a few years ago. That is a change in work that we can see, but I don’t think it will change society as such. I think in society the digital change is already happening.

We spoke about the first industrial revolution with mass layoffs, do you believe that this is something which will happen now again? Jobs are becoming obsolete through automation, but at the same time new jobs are created. What do you think is the balance here?

I think it is true that job skills will change. It is difficult for me to speculate which areas will be hit, but that’s something that happened also for other reasons in the past. The production of consumer electronics in the 1950s took place in the US and Germany, however, today almost no consumer electronics are produced in Germany or the US anymore. This has nothing to do with digitalization, just with the general economic development. This adjustment of skills and industries is always with us. Maybe there are periods where it is faster as in these twenty or so years of digital revolution, but in twenty years lots of things change anyway. I don’t really expect anything massive to happen very fast, but I do expect that when we look back in ten years, it will look different and skills needed at factories will look different as well.

In which way do you work together with local start-up companies?

We have been working with start-up companies for roughly twenty years. Recently, we have bundled all these cooperation activities in a company called next47 which is a memory of the founding year of Siemens in 1847 as a start-up. We have three ways of interacting which we want to continue. The first one is investment, where we invest in start- up companies which are interesting for our technical portfolio. The second one is to found new companies, where we spin off parts of technology that have been developed in Siemens and use the IP generated as a first asset for a new company. The third one, which I think is more important, is partnering. Here, we focus on start-ups focusing on parts of the production process or the value chain that is not really part of our focus but will help us. We could be a customer for these companies and we could also help them to get closer to more of their customers. We have had an office in Shanghai for more than ten years, which works with local companies and has pioneered mostly this partnering approach.

Local adaptation is the most widely stated reason of German companies to engage in R&D in China. In which industries is this most relevant? Which role does China play in Siemens’ worldwide R&D?

Of course we also do some of this work in China, but I don’t think it is at the core of our engagement anymore. Siemens has around 4,500 engineers in China of which more than 600 are in Corporate Technology where they do business development and some adaptation, but also some products are developed completely here with our local resources and local insights and will become global products. Even the “local for local” is not key anymore. We have a strategy here that is called “be global, be local and be open”. Be global means that we can bring what we use or develop e.g. in Munich to our business units here. Be local means that we learn from local use cases and local challenges, which enable us to spearhead the use of new technologies here. Be open means that we have local partners, for example cooperation with universities and start-ups. Combining these three, CT China has become a key part of the global Siemens Corporate Technology network and contributes to the company, and of course to costumer benefit.

Dr. Mertens, thank you very much for your time.

Dr. Peter Mertens, Head of Research, Siemens Corporate Technology China, speaking with Mr. Sebastian Suciu, Executive Chamber Manager and Ms. Jana Kumpf, Deputy Chamber Manager, German Chamber of Commerce | North China

Features 1 - Hospitals in China

The Next Sector for Foreign Investors?
by DR. ULRIKE GLUECK AND NICOLAS ZHU

According to media reports, on 23rd May 2017, the German-based hospital group Artemed Group signed a customized lease agreement with Waigaoqiao Group in China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”) . Artemed Group plans to establish a multi-specialty hospital in Shanghai FTZ. Waigaoqiao Group has agreed to construct buildings for the hospital according to Artemed Group’s requirements. The signature of this agreement signifies a significant step forward regarding the realization of foreign invested hospital projects in China. and draws attention of foreign investors to foreign invested hospitals in China again. 

Development of the Chinese legislation for foreign invested hospitals

The hospital sector in China is highly regulated. Before 30th January 2012, the establishment of foreign invested medical institutions was classified into the restricted category under the Catalogue of Guidance of Industries for Foreign Investment in China (version 2007) (“Guideline Catalogue”) and it was only possible to set up a foreign invested hospital in the form of a joint venture.

Such restriction was cancelled in the 2011 version of the Guideline Catalogue which implied that it was possible to set up a wholly foreign invested hospital in China. In this context, the Tentative Administrative Measures on Wholly Foreign Invested Medical Institutions of Shanghai FTZ were issued on 13th November 2013. Afterwards, on 27th August 2014, the National Health and Family Planning Commission (“NHFPC”) and the PRC Ministry of Commerce jointly published the Circular relating to the Pilot Work for Establishment of Wholly Foreign Invested Hospitals. This circular enlarged the pilot area for wholly foreign invested hospitals through green-field investment or acquisition to seven provinces and municipalities, including Shanghai, Tianjing, Beijing, Jiangsu Province, Fujian Province, Guangdong Province and Hainan Province.

However, the 2015 version of the Guideline Catalogue classified foreign invested medical institutes into the restricted category again, which implies that the establishment of wholly foreign invested hospitals is not permitted any more. In December 2016, the PRC Ministry of Commerce published a draft of an updated version of the Guideline Catalogue which is will be enacted on 28th July 2017. In this draft, the establishment of foreign invested hospitals is still classified under the restricted category.

The restriction related to foreign invested hospitals seems contrary to the recent policies which encourage hospital development in China. The National Medical and Health Service System Planning Outline (2015-2020) published by the State Council on 6th March 2015 encourages the development of wholly foreign invested hospitals through pilot projects. Further, local regulations for medical planning, such as Shanghai Health and Family Planning Reform and Development Planning (2015-2020) of 2nd August 2016, also show a strong need of upgrading medical services and high-end medical services.

The need for more and better high-end medical services is apparent. According to the above mentioned National Medical and Health Service System Planning Outline (2015-2020), Chinese medical services recently have encountered the following problems:

  • Insufficiency of medical service resources due to the increasing economic development and the needs of Chinese citizens;
  • Unreasonable structure of medical services resources, which impedes the efficiency of medical institutes in providing medical services, especially in pediatrics, psychology, rehabilitation and caring for the elderly;
  • Fragmentation of medical services, which leads to failure to share information and failure to form synergies, especially for chronic diseases;
  • Incomplete reform of government-funded hospitals, which affects the development of non-government-funded hospitals;
  • Difficulties of the government to manage medical resources.

Despite of the above, the legal uncertainties on feasibility of wholly foreign invested hospitals in China may lead foreign investors to have doubts about the future of establishing wholly foreign invested hospitals.

Development of the Chinese legislation for foreign invested hospitals

The hospital sector in China is highly regulated. Before 30th January 2012, the establishment of foreign invested medical institutions was classified into the restricted category under the Catalogue of Guidance of Industries for Foreign Investment in China (version 2007) (“Guideline Catalogue”) and it was only possible to set up a foreign invested hospital in the form of a joint venture.

Such restriction was cancelled in the 2011 version of the Guideline Catalogue which implied that it was possible to set up a wholly foreign invested hospital in China. In this context, the Tentative Administrative Measures on Wholly Foreign Invested Medical Institutions of Shanghai FTZ were issued on 13th November 2013. Afterwards, on 27th August 2014, the National Health and Family Planning Commission (“NHFPC”) and the PRC Ministry of Commerce jointly published the Circular relating to the Pilot Work for Establishment of Wholly Foreign Invested Hospitals. This circular enlarged the pilot area for wholly foreign invested hospitals through green-field investment or acquisition to seven provinces and municipalities, including Shanghai, Tianjing, Beijing, Jiangsu Province, Fujian Province, Guangdong Province and Hainan Province.

However, the 2015 version of the Guideline Catalogue classified foreign invested medical institutes into the restricted category again, which implies that the establishment of wholly foreign invested hospitals is not permitted any more. In December 2016, the PRC Ministry of Commerce published a draft of an updated version of the Guideline Catalogue which is will be enacted on 28th July 2017. In this draft, the establishment of foreign invested hospitals is still classified under the restricted category.

The restriction related to foreign invested hospitals seems contrary to the recent policies which encourage hospital development in China. The National Medical and Health Service System Planning Outline (2015-2020) published by the State Council on 6th March 2015 encourages the development of wholly foreign invested hospitals through pilot projects. Further, local regulations for medical planning, such as Shanghai Health and Family Planning Reform and Development Planning (2015-2020) of 2nd August 2016, also show a strong need of upgrading medical services and high-end medical services.

The need for more and better high-end medical services is apparent. According to the above mentioned National Medical and Health Service System Planning Outline (2015-2020), Chinese medical services recently have encountered the following problems:

  • Insufficiency of medical service resources due to the increasing economic development and the needs of Chinese citizens;
  • Unreasonable structure of medical services resources, which impedes the efficiency of medical institutes in providing medical services, especially in pediatrics, psychology, rehabilitation and caring for the elderly;
  • Fragmentation of medical services, which leads to failure to share information and failure to form synergies, especially for chronic diseases;
  • Incomplete reform of government-funded hospitals, which affects the development of non-government-funded hospitals;
  • Difficulties of the government to manage medical resources.

Despite of the above, the legal uncertainties on feasibility of wholly foreign invested hospitals in China may lead foreign investors to have doubts about the future of establishing wholly foreign invested hospitals.

Trends of business models for foreign investment in Chinese medical services market

At present, foreign hospitals cooperate with Chinese hospitals in the following ways:

  • Contractual model (know-how and/or resources exchange): a Chinese hospital enters into a cooperation agreement with a foreign hospital relating to technology or know-how transfer, the introduction of high-tech equipment, education or continuing education of doctors or the exchange of doctors. This business model, although popular, is regarded as establishing a preliminary pipeline of communication between foreign and Chinese hospitals. Nevertheless, Chinese hospitals are now expecting deeper communication and exchange with foreign investors in order to benefit from the reputation and know-how of foreign hospitals.
  • Contractual model (management standards upgrade): a Chinese hospital enters into a cooperation agreement with a foreign medical service company under which the foreign medical service company introduces modern management standards to the Chinese hospital (or upgrades existing standards). But medical treatment and diagnostics remain in the responsibility of the Chinese hospital. Although it has a promising perspective, this business model is facing some challenges especially after an incident where in 2016, a Chinese individual named Wei Zexi died after being treated by a medical department in a high-grade hospital which was sub-contracted to an external third party. In the absence of clear regulations, it is difficult for Chinese hospitals to distinguish such a contractual model from subcontracting of an internal medical department by a Chinese hospital to a third party, and thus, can lead to potential legal and commercial risks. 

  • Joint venture hospital model: A Chinese hospital and a foreign hospital establish a Sino-foreign joint venture hospital. 

  • Wholly foreign invested hospital model: legally speaking, only wholly Hong Kong, Macau or Taiwan invested hospitals are permitted nation-wide in mainland China. For foreign investors of other jurisdictions than Hong Kong, Macau and Taiwan, wholly foreign invested hospitals are only limited to the seven municipalities and provinces set forth in the NHFPC circular of 27th August 2014 as mentioned before. Therefore, a possible way of market access for foreign investors is to acquire a Hong Kong, Macau or Taiwan holding company to realize an indirect investment in hospitals in China held by these Hong Kong, Macau or Taiwan holding companies. 

In the current situation, on the one hand, Chinese hospitals are keen on setting up joint ventures with foreign investors to benefit from their know-how and worldwide reputation and to achieve a deeper and firm cooperation. On the other hand, foreign investors may be more inclined to set up a wholly foreign invested hospital or to cooperate on a contractual basis, in order to ensure their independency and smooth implementation of their decisions. The above difference may inevitably lead to long-march negotiation between the Chinese and foreign investors regarding the way of cooperation as well as the risks behind.

Some Key Issues to be Paid Attention to at the Time of Establishment and Operation of a Foreign Invested Hospital 


The ambiguity of Chinese regulations regarding foreign invested hospitals, especially the underlying regulation for foreign investment (i.e. the Guideline Catalogue) and the regulations of NHFPC related to cooperation with foreign hospitals, being inconsistent with the underlying regulation for foreign investment, often make it difficult or even risky for foreign investors to cooperate with Chinese hospitals. 
Foreign investors should pay attention to the following issues when establishing and operating a foreign invested hospital in China: 


a) Form of foreign invested hospital (joint venture or wholly foreign owned enterprise) 


If the newly-revised Guideline Catalogue is published without revisions to the approved draft as mentioned above, foreign invested medical institutes will still be classified into the restricted category national wide. Then, foreign investors need to further check whether a wholly foreign invested hospital is permitted in the current 7 pilot municipalities and provinces mentioned in the above circular of NHFPC of 27th August 2014. The validity of both, the Guideline Catalogue and the circular are at the same level from a legal perspective.

b) Practicing license of doctors and therapists in China

At present, foreign doctors can be granted practicing licenses in China for only one year after approval of the competent health authority. After this one-year license expires, foreign doctors then should re- register for a further one year license. Doctors from Hong Kong, Macau and Taiwan are granted such licenses for three years after approval of the competent health authority. Currently, it is not clear whether the existing policy regarding the practicing licenses of foreign doctors will also apply to foreign doctors practicing in a wholly foreign owned hospital.

c) Land

Hospitals shall be set up on land or premises to be used for medical purpose. Foreign investors need to carefully check the purpose of the land and premises in order to avoid potential risks. A piece of land or the premises which do not comply with the purpose of medical treatment under PRC law may trigger the failure of the project, i.e. the hospital may be asked to be relocated and the buildings might be demolished. Instead of a green-field investment, an acquisition of an existing Chinese funded hospital may be helpful to mitigate this risk.

d) Medical service fees

Pricing will be an important factor to be considered by foreign investors as all high value technology needs to be reflected through a pricing mechanism. The Circular related to the Opinion on Promotion of Medical Services Price Reform issued jointly by the National Development and Reform Commission (“NDRC”), the NHPFC and the Ministry of Human Resource and Security on 1st July 2016 provides that the pricing of non- government funded hospitals shall follow the market pricing regime in terms of pricing. The Circular on Further Regulating the Medical Services and Pricing of For-Profit Medical Institutes of Shanghai provides that a foreign invested hospital’s service fee shall be decided by the hospital itself in compliance with the principle of “cost plus reasonable profit”, rather than being subject to cap price control by the local health authority and the pricing bureau (which are only applicable to government-funded hospitals). However, a foreign invested hospital does still has to file its service items and prices with the competent health authority and the pricing bureau. “Reasonable profit” is a negotiable issue with the local health authority and the pricing bureau. It is hard to know whether and to what extent the local health authority and the pricing bureau will refer to the cap price applicable to government-funded hospitals.

The pricing of medical services may also be considerably affected by the recent reform of medical industry in China for the following reasons:

  • According to the circular of the State Council related to the Further Improvement of Medical Regime of 8th November 2016, government funded hospitals are required to stop adding any mark-up onto the price of the drugs that they have purchased from drugs manufacturers or distributors. According to the information from NDRC officers, it is expected that all Chinese government funded hospitals will stop adding any mark-up as from September 2017. This approach will considerably reduce the margin of the Chinese government funded hospitals where in the past, they were allowed to add a mark-up of up to 15% on the price of the drugs that they have purchased from drugs manufacturers or distributors;
  • The State Council has also issued the Circular related to the Implementation of Two Invoicing System All Over China for Government Funded Hospitals on 26th December 2016. According to this circular, the distribution chain of drugs from manufacturers to hospitals are largely reduced to two invoices (i.e. the first invoice from pharmaceutical manufacturers or importers to pharmaceutical distributors and the second invoice from pharmaceutical distributors to hospitals), with an aim to control the final price of drugs to be sold to government funded hospitals. This pilot project will start first from government-funded hospitals in pilot regions with an effort to be implemented in all kinds of hospitals all over China as from 2018; 

  • Further, the Circular of the State Council related to the Further Reform and Improvement of Policies of Manufacturing and Distribution of Pharmaceuticals dated 24th January 2017 provides that hospitals cannot restrict patients from purchasing drugs directly from external pharmacies instead of from the internal pharmacies of hospitals, and hospitals shall explore the practice to split their internal pharmacies for outpatients from hospitals.

All the above regulations are aimed to prevent hospitals from gaining profits from the sale of drugs, and therefore, the profitability of hospitals due to sale of drugs will be largely reduced. This implies, on the other hand, that medical services, especially the pricing of medical services, will be a key factor of profitability of hospitals, and to this end foreign- invested hospitals may benefit from the greater experience of their foreign shareholders. 


Currently, when in investing in medical services in China the ambiguity of the related PRC regulations for wholly foreign invested hospitals must be taken into consideration. However, the demand of high-end medical services in China especially from foreign invested hospitals is strong and can expected to be even stronger in the future. The medical service sector is now undergoing a big reform in China, not only for foreign investors but also for Chinese hospitals. Medical services will be a key area of competition in the future and a key factor of profitability, so it is still worthwhile for foreign investors to explore.

Further Information

Dr. Ulrike Glueck is the managing partner of CMS, China. CMS advise in the areas of corporate and M&A, distribution and commercial, employment, banking and finance, insurance, competition, real estate and construction, IP, dispute resolution as well as tax and customs. They have been active in China for more than 30 years.

Nicolas Zhu is Partner of CMS, China and Head of the Life Sciences Sector Group of CMS, China. 

Features 2 - CS LAW and its Implementation

What Companies Should Know
by DR. MICHAEL TAN AND LYNN ZHAO

The new PRC Cyber Security Law that took effect on 1st June 2017 (“CS LAW”) has been a hot topic in media ever since its first draft was presented to the public for comments in 2015 and still remains hot among business communities. To better understand its implications, reading the law alone is not enough. For example, the very widely discussed question of critical information infrastructure operator (CIIO) has already confused many people. The CS LAW does not provide a definition of this term, but rather give some exemplary sectors (e.g. telecom, energy, transportation and major infrastructures) and general criteria of importance as well as sensitivity such sectors. Foreign companies, if not completely barred, are not supposed to play an active role in such sectors due to investment access restrictions. A pure literal reading of Article 37 of the CS LAW will not lead to the conclusion that this is something which most foreign operation needs to worry about, since the description of CIIO seems more generally to refer to those big state-owned companies in the key industries of concern.

However, the actual picture is much more complex. The CS LAW is not a single law, but part of the overall security system overhauled by Chinese leadership to address various new challenges which China is facing nowadays. This will have a substantial impact on foreign companies operating in China. Companies need to interpret the CS LAW in a wider context particularly as it regards to how this law was created and how it is going to be implemented to properly understand its relevance to businesses and related implications.

Squeeze-out of Foreign In uence in Sensitive Sectors

This story dates back to 12th November 2013, when the Communist Party of China (“CPC”) rolled out its Decision on Some Major Issues Concerning Comprehensively Deepening the Reform. This document is the ruling party's policy framework on cyber security. For the first time, it explicitly states that an internet administrative and guiding mechanism should be developed to ensure the State's network and information security. This includes the establishment of a State Security Commission to handle national security strategies. Shortly after that, the Cyberspace Administration of China ( 国家互联网信息办公室 in Chinese, also known as the Office of the Central Leading Group for Cyberspace Affairs, “CAC”) was established on 27th February 2014. CAC reports to the Central Leading Group for Internet Security and Informatization ( 中央网络安全和信息化领导小组 ), which is a high-ranking workgroup composed of the Chinese President and Premier as group leaders. It is quite unprecedented that State leaders take part in a working level group of this type and it sends the rest of the world a very strong signal that cyber security takes top priority on the political agenda of Chinese leadership. All these could be seen as a natural and speedy response to Snowden’s revelations and the disclosure of the US PRISM project.

Shortly after the setup of CAC, a so-called De-IOE campaign was launched. It was explicitly aimed at getting rid of IT systems supplied by the three major US players IBM, Oracle and EMC, and replacing them with equipment and technology developed by Chinese companies, particularly replacing equipment in the banking sector. This could be seen as a step- up from the earlier multi-level protection scheme (MLPS) crafted by Chinese policy makers. Around the same period, the concept of "secure and controllable information technology" (SCIT) was further introduced through both publicly available rules and, more practically important, internal rules like those pushed down to banks by the China Banking Regulatory Commission. Though conducted in the name of protecting China’s national security and cyber security, all these moves taken by the Chinese policy makers have substantial impacts on foreign business, particularly those conducting technology business.

These more or less get formalized under the CS LAW. Though nothing new, foreign companies heavily complained that these actually serve to protect a great swath of Chinese industries from international competition as well as to promote China’s new core development strategy of “indigenous innovation”. Impact on All Digitalized Business: Data Export Control

It is easy to tell that foreign companies conducting technology business, in particular those supplying hardware and related IT technologies to their Chinese customers will be adversely affected by MLPS and SCIT embedded in the new regime based on the CS LAW. But what about other business like traditional manufacturing and service companies. Will they also be caught and affected by the CS LAW? The answer is a very likely yes.

The point here is that besides regulating what hardware and IT solutions shall be used in China, the Chinese government is also keen to build up its sovereignty in the cyber world by implementing border control. This does not refer to the well-known great Chinese firewall (GFW) which has already been deployed for many years as an IT solution blocking inflow of sensitive content and even services of foreign companies like Google and Facebook. Instead, it refers to a legal framework applicable to another direction, i.e. data export out of China.

The CS LAW does address the issue of data local storage and export control, which is, however, mentioned in the context of CIIO’s obligations (i.e. Article 37 of the CS LAW). On 11th April 2017, CAC issued its draft Measures for the Security Assessment of Export of Personal Information and Critical Data (“Export Measures”), which was supposed to take effect the same day as the CS LAW (i.e. 1st June 2017) as they are closely associated with Article 37 of the CS LAW and supposed to provide more clarity on how CIIOs shall handle data export. Very much of a big surprise to the public, CAC greatly extend the reach of the Export Measures which now will also have an impact on companies which are not a CIIO.

  • First these Measures repeat the local data storage obligation under Article 37 of the CS LAW but apply this obligation to ‘network operators’ (not only CIIOs). The term ‘network operators’ is further defined to be those who own networks, manage networks and provide network services. This is a very broad term which in the real world could potentially cover any business which usually has online features (e.g. cloud based services like industrial 4.0). Moreover, the Export Measures further stipulate that ‘other individuals or organizations’ shall also handle data export clearance matters by referring to these Measures. So, no escape in general.
  • Export clearance is mentioned under Article 37 of the CS Law as a must for CIIO to export sensitive data, namely personal data (i.e. more individual based data) and critical data (e.g. more group based data) collected and generated within the territory of China. The Export Measures provide more detail on how such clearance (i.e. assessment by administrative authorities) shall be conducted. However, besides explicitly mentioning data export by a CIIO, these draft measures further include many other scenarios where an administrative clearance will be triggered, e.g. export of personal information involving over 500,000 individuals (including on an accrued basis), export of data exceeding 1,000 GB and other circumstances potentially impacting national security and the public interest where an assessment is deemed necessary.

In general, the Export Measures not only expand the scope of who shall be subject to administrative clearance procedures for data export, but also broaden the scope of what data shall trigger such a clearance. Although they still remain as drafts and the latest draft was said to have softened its position (e.g. deletion of the above “other individuals and organizations” as well as the 1,000 GB threshold), the expansive interpretation of the data export clearance obligations under Article 37 of the CS Law will stay. Since cross border data flow might be inevitable for business operation in nowadays digitalized world, this means any international companies operating in China will potentially be caught by this new obligation derived from the CS Law.

More to Watch Upon and Take Care

As far as foreign companies are concerned, effectiveness of the CS Law brings complicated implications in many aspects. Market access pressures could easily be felt by those IT equipment and solution suppliers due to the more stringent requirements of Chinese customers resulting in potential loss of market share. A more localized business model including teaming up with a Chinese partner, as happened in the past in the high-speed railway sector, might become more popular to tackle this new challenge.

Data export control will have a much broader and more comprehensive impact on business. Although it may be reasonably expected that CAC’s far-reaching position might be softened a bit in the end to keep a proper balance between business viability and control, the determination of CAC to flex its muscle should not be underestimated. The formation of CAC and its various legislative moves recently (e.g. its new full-fledge procedural rules on enforcement against internet content breach) already implies a re- shuffling of administrative power among the various ministries. This could likely result in more problems instead of less for the business society due to competition for power and territories among different governmental authorities. The escalating likelihood of criminal offense named “refusal to perform cyber security obligations” as indicated under a recent judicial interpretation jointly issued by the Supreme People’s Court and the Supreme People’s Procuratorate further enlarges compliance exposure of international business in China including related management liabilities.

As a general recommendation, all companies using internationally deployed IT solutions will need to carefully revisit their current IT architect and organizational protocols to evaluate potential risks of breaches. It should not become a task of IT or legal departments. Engagement of all the departments and particularly the management will be the key to ensure proper results and success.

Further Information

Dr. Michael Tan is a partner in Taylor Wessing Shanghai Office. He has more than ten years of experience advising multinational companies in their investments and operations in China. Besides his expertise regarding the general foreign investment corporate matters, he specializes in IT regulatory, data protection, e-commerce issues and other new technology driven sectors. He is familiar with the rapidly developing TMC sector in China.

Lynn Zhao specializes in the legal areas of corporate M&A, foreign investment regulatory issues, commercial and exchange control. Lynn is a member of the firm’s Technology, Media and Communications group. She has a focus on data protection issues and constantly contributes insight to the firm’s Global Data Hub project.

Taylor Wessing is a full-service law firm with over 1,200 lawyers in 33 offices in Europe, the Middle East and Asia, including three offices in China (Beijing, Shanghai and Hong Kong). For more information please visit www.taylorwessing.com. 

Features 3 - Getting Accustomed to Customs

Risks in Pricing Practice
by HONGXIANG MA and LYRA LV

Ever since 11th December 2002 when China became a WTO member, pricing has been an increasing focus of customs authority to check while China decreased tariff rate per WTO commitment. This particularly applies to import price of traded commodities between related parties and non-trade payment such as royalties or service fees, if they are to certain extent related to import goods. In case the import price declared is out of the range of import price index based on customs’ authority’s databank or if there is certain link between imported goods and non-trade payment, the customs authority will conduct import price adjustment so that additional import duty and import VAT will be levied. The additionally levied import duty becomes costs of import enterprise.

From the beginning of 2017, General Administration of Customs (GAC) has even launched a campaign to investigate approximately 20,000 enterprises that have substantial non-trade payment in a year with related parties, one by one. It should be noted that the majority of the 20,000 enterprises are the Chinese subsidiaries of multinational groups.

In view of the recent customs development, the following shall be noted concerning the valuation of import goods and tax risks of import-related non-trade payment based on our observation: 

How Does the Customs Authority Identify Their Pricing Inspection Targets?

Considering involvement of time and personnel resources in the inspection, industries with high profit level or large amount of royalty payment are the major targets of this investigation. They are e.g.:

  • Industry of consumption products: Cosmetics, Clothing, Watch, Jewelry, Food
  • Industry of Machinery Production: Large-scale equipment, Production line, Vehicle
  • Industry of Electric and Electronic: Integrated circuit, Printed circuit board.
  • Pharmaceutical Industry: Medicine production
  • Cultural industry: Movie, Audio and video production, Media industry, etc.

Risk Area I: Relationship between Duty-paid Value and Non-trade Payment e.g. Royalty and High Tax Burden

According to the Measures of Customs for Assessing and Determining the Duty-paid Value of Imported and Exported Goods, the royalties related to import goods, including royalty for patent rights, the right to use know- how, trademark right and copyright, regardless paid directly or indirectly by the buyer, shall be included in the duty-paid price of the imports.

Only when the royalties are irrelevant to the goods, or the payment of royalties does not constitute the conditions for the goods to be sold in China, it should not be taxed by customs.

Example 1:


Buyer and Seller agree on an import deal which has one condition: in case the buyer fails to pay the royalties to Seller, the buyer will not be entitled to purchase the imported goods, or the discount of the goods cannot be agreed upon under the conditions stipulated in the contract. Will the royalty be part of import price?

Answer:


Yes, because the royalty payment consitutes one condition of the sale.

In practice, import enterprise and customs often have disagreements on how to determine ‘constituting conditions for the goods to be sold in China’, namely the above mentioned “relationship between import goods and royalty”.

Example 2:


Buyer imports a seller machine to facilitate production in China from a foreign seller. For the production process, the buyer signs know-how transfer agreement for the production process related know-how and pays know-how fee. Is the know-how license fee related to imported production machinery and therefore it shall be part of import price of import machinery?

Answer:


No. This is because import taxes shall be levied on the import value of imported goods and upon import. When the machinery is imported, no value of the production know-how is attached to the machinery.

For the purpose of finding “relationship” between trade and non-trade items, customs authority will normally request all transaction documents between importer and overseas business partners. The ‘Big Data’ mechanism built up by the government also enables customs authority to exchange information with different government authorities such as tax, foreign exchange departments, etc.

Non-trade payment such as royalty usually is subject to domestic taxes, e.g. turnover tax and withholding income tax. When the customs authority levies custom duties and import VAT on them, an extremely high tax burden will be caused. Even if VAT can be used as input VAT credit for the importer, but still significant impact will be caused on the cash flow.

Assuming that one Chinese enterprise should pay royalty with contract price RMB 1 million to overseas: the royalty was determined by customs authority that the value shall be included in duty-paid price of imported machinery with customs duty rate of 10%, at the same time tax authority will levy applicable taxes, the tax exposures are summarized as below: 

Risk Area II: Related Party Transaction

In case of related party transaction in import business, customs authority may challenge importer with the reasonableness of import price in particular when the import price is out of the “range“ of import price for the same or similar products imported at the same or similar timing that customs authority has in his databank. In this case, disputes may be settled with negation and certain kind of pricing method that both parties could agree upon.

Comparing with tax regulations, the customs’ criteria on special relationship (related-party) covers more scenarios. For example, when one party is the exclusive deputy, distributor or assignee of the other party, it may be deemed by the customs authority that there is a special relationship between them.

When it comes to price assessment, if enterprises and foreign suppliers are in special relationship, the customs authority may hold the prejudice that enterprise may have a defending position due to the “relationship”, thus it will conduct a more stringent attitude on the royalties paid to overseas.

This applies when one multinational group conducts restructuring for commercial purpose, e.g. set up new trading company in China rather than rely on Chinese agents. This kind of restructuring would usually lead to the result that the import prices for goods imported decrease due to relocation of functions and risks among on and offshore enterprises, e.g. the Chinese trading company takes over more function so that e.g. based on subtractive method the import price shall be lower after deduction of costs and profit margin of the new trading company. 

Risk Area III: Double taxation due to Contradictory Valuation method from customs and tax aspects

Currently, the customs and tax authority have similar valuation methods on the taxable price of imported goods.

However, due to different interest standing point, tax authorities usually prefer a lower import price which shall be paid to reduce cost of enterprises so that more corporate income tax shall be paid while the aim of customs authority is to maximize the price of imported goods, so that it could levy more import duty and VAT. Based on the current tax system in China – no harmonization of customs duty and domestic tax, double taxation may occur.  

Proceeding to Eliminate or Reduce Customs Risks

  • According to the new declaration requirements of customs announced in 2016, royalties shall be declared on own initiative and will be shown as corresponding options on customs declaration form. If importer does not comply with this disclosure obligation, enterprises may face penalty due to false declaration once customs authority determines that the royalties are related to the import goods in the post inspection.
  • It is recommended to conduct self-check on the above-mentioned risk areas by checking the past agreements and past imports for a good preparation of the customs authority’s check.
  • Before signing royalty or non-trade contract with overseas supplier, enterprises should take possible tax risks into consideration and make a reasonable distinction between royalty related to import goods or not from both fact and contractual formality aspect. If necessary, relevant contracts could be submitted to the customs authority for “pre- assessment” of pricing. Customs authority is usually obliged to handle such application with certain exceptional cases. Before approaching customs authority, it is advisable to involve professional tax advisor to review the documents for efficient communication with customs authority.

Further Information

Hongxiang Ma is a managing partner of MY & Associates with offices in Shanghai and Munich. She has over 20 years of experiences in cross-border tax and customs consulting for multinational companies. She can be reached by email hongxiang.ma(at)my-associate.com

Lyra Lv is anassociate at MY & Associates Shanghai Office.

MY & Associates is a professional consulting dedicated to providing cross-border tax and customs advisory services. 

More than Business - Second “More than a Market Awards” Honor Corporate Social Engagement Projects

How can German companies in China give back to the society in which they are operating? How can they create a positive impact in their communities and Chinese society at large?

German companies in China are exploring manifold ways to do good. Between October 2016 and 28th February 2017, German companies with operations in Mainland China submitted an impressive total of 75 applications for this year ́s More than a Market Awards. On 15th June 2017, the German Chamber of Commerce in China, together with Bertelsmann Stiftung and supported by the German Consulate General Shanghai awarded the More than a Market Awards to seven projects to honor German companies' outstanding social engagement in Chinese society. The Gala was again hosted by Ms. Bettina Schön, chairwoman of the board of the German Chamber of Commerce in China | Shanghai.

The submitted projects covered a wide range of challenges: providing children with better access to education, caring for one ́s migrant workers’ children, integrating people with disabilities into the work force, supporting vocational training, as well as other charitable, social and environmental causes. Next to benefiting both the target groups and one ́s own employees, such endeavors also help raise awareness to tackle social and environmental challenges in general. The many examples of companies caring for social needs is also part of the larger picture of increasing social innovation in China. Empowering China ́s youth to increase their innovation capacity played a significant role in this year ́s projects. That way, in the long run, young talents are enabled to independently identify social challenges and their solutions.

A Glance into the Winning Projects

A Chinese-German jury carefully evaluated the 75 projects and selected this year ́s winners based on criteria such as project relevance, creativity, transferability and sustainability.

While last year, our Awards had been handed out in the categories of small-, medium-, and large-size enterprises as well as collaborative projects, this year, the jury agreed on an additional award category: Among all submissions, the number of remarkable projects where German companies cooperated with Chinese schools stood out, hence, an award for ‘School Projects’ was created.

Among the 18 short-listed finalists, the following projects won a More than a Market Award in 2017:

Category 1: 1 – 500 employees in China 

In the category “Small Enterprises (1-500 employees in China)”, rose plastic (Kunshan) was chosen for its ongoing education program “SPARK THE FUTURE” teaching children English in underprivileged areas via the internet.

Category 2: 500 – 5,000 employees in China 

In the category “Medium Enterprises (500-5,000 employees)”, Lanxess received the award for their exemplary engagement in their Water Protection Project, aimed at increasing public awareness and capability of protecting water resources.

Category 3: over 5,000 employees in China 

In the category “Large enterprises (more than 5,000 employees)”, SAP Labs China received the award for their comprehensive approach to preparing young people for an innovation-driven economy with their SAP Labs China TREES Program.

Category 4: Collaborative projects 

In the category for “Collaborative Projects”, which are initiated by two or more German companies, the Football Project Team was selected. The objective of the project is to give migrant children the opportunity to enjoy football training and modern physical education, while having an integrative effect and promoting self-confidence, tolerance and teamwork.

Category 5: School projects 

Acknowledging the overwhelming number of German companies engaged in supporting schools and pupils, an additional fifth category “School Projects” was introduced. The companies Bosch Automotive Products (Suzhou), Freudenberg and Wacker Chemicals (China) were jointly awarded the prize for building schools, providing funds , supplies and training to students and teachers in earthquake-affected areas.

Encouraging Keynote Speeches

The Awards were received at our special More than a Market Gala evening, where Ms. Liz Mohn, Vice-Chair of the Executive Board of Bertelsmann Stiftung – an important German private business foundation - and Ms. Yue-sai Kan, famous Chinese-American media personality, writer, entrepreneur and philanthropist, honored attendees with their presence and held encouraging speeches. Ms. Mohn emphasized the impact of CSR on society and the workforce:

"Without the motivation of our people, we cannot live up to our capacity; without values such as trust, tolerance and responsibility, we cannot be successful. Corporate social responsibility is an increasingly important issue and ranges among one of the contemporary global issues."

Ms. Kan shared her personal experience with the development of charity in China. She explained that giving for charity is a recent phenomenon and that giving in a meaningful way requires learning processes. She emphasized that there is still a road ahead, but in conclusion, she encouragingly stated:

"I am truly excited about philanthropy in China. I’ve seen the growth and I really believe that the future is magnificent."

Saying Farewell to "More than a Consul General"

At the conclusion of the Awards ceremony, with a humorous yet a melancholic tone, Consul General Mr. Peter Rothen was presented with the “More than a Consul General Award” in recognition of his tremendous support and personal commitment during his years in Shanghai. Not only did he wholeheartedly support the “More than a Market” initiative, where he served as a jury member, a steering committee member and inspired the initiative of localizing the UN Global Compact for the Chinese context. With his high personal commitment, he served as an advocate of German companies in Shanghai, inspired and made great contributions to Sino-German friendship. In his farewell speech, Mr. Rothen extended a warm thank you for being part of the More than a Market initiative and, in general, for having been warmly received in the Shanghai German community, while he shared personal impressions about his time in Shanghai:

"...everyday, I had experiences that made me think this cannot be true, that I am here in a place where really the future is being shaped and where I can be part of this. Where I can link to actors, that are shaping the future. ... this country leads in dynamics and in positive spirit about the future, and I personally can just say, I have learned a lot." 

Shanghai, for him, was “a hell of a ride”, “absolutely stunning” and this was also mainly due to the German business community here which he has experienced as “the epicenter of German business engagement anywhere in the world.” 

The More than a Market Forum

The More than a Market initiative aims to catalyze and promote social engagement of German companies operating in China. Therefore, the More than a Market Forum is key for idea sharing, project development and topical discussion on Corporate Social Responsibility (CSR) issues between all companies that would like to participate. This year ́s Forum was again co-hosted by Ms. Simone Pohl and Mr. Rolf Koehler, who presented the new More than a Market publication. In her opening address at the Forum, Ms. Liz Mohn, stressed:

"We need enterprises, that excel in farsighted thinking and social engagement. We need executives in enterprise themselves set an example of values such as benevolence, respect, responsibility and humaneness (philanthropy), in order to be successful." 

Honorable jury member, Mr. Oliver Ye Yang from Shanghai Soong Ching Ling Foundation, introduced recent trends in CSR in China that are of relevance to companies operating in China during his keynote, including the Sustainable Development Goals, Green Financing and the role of social media. He showed that CSR is an emerging trend ain China, but the ratio of companies engaging in CSR is still very small with much room for further social innovation.

The ABCs of CSR - How to Embed CSR into Your Value Chain (with Syntao)

This workshop gave a concise overview of CSR concepts and how to best apply them to one ́s own company. Participants inquired into what functions of a company can be integrated into a holistic CSR strategy that includes each aspect of value creation. Aspects such as bottom up commitment to CSR and the goal of moving from charity to sustainability were covered. First-hand examples were given from a range of different companies that are active in CSR in China.

Making Inclusion Work – Creating Job Opportunities for People with Disabilities (with Konrad Adenauer Stiftung Shanghai)

In China, generally, every company should employ people with disabilities. This workshop shared impressive success stories and discussed remaining challenges when integrating staff with special needs. It became clear that the whole company must be well prepared to receive staff with special needs so that inclusion can be successful. Furthermore, it often takes patience to convince all relevant management. Social enterprises go through hardships and resource scarcity, but for individuals with special needs, job opportunities support their personal empowerment and autonomy.

Improving Existing Projects – Impact-Oriented Corporate Citizenship (with Bertelsmann Stiftung)

The importance of CSR is growing globally and many companies are certain they have a responsibility to “give back” to society. Companies have therefore stepped up their efforts. However, these efforts sometimes lack effectiveness, since good intentions are not always sufficient to create genuinely productive social projects. This workshop discussed how social responsibility can be productively coupled with sound strategies to promote goodwill, while building sustainable and impressive businesses. It introduced the input-output-outcome-impact (iooi) method.

German-Chinese Initiative for Sustainable Business (with and supported by Econsense and the Wittemberg Center for Global Ethics)

This workshop introduced a new cross-industry initiative where leading German companies commit to a German-Chinese partnership to develop sustainable supply chains in China. It aimed at exchanging experiences and identifying challenges of sustainable supply chains. The initiative will collect further evidence throughout China and Mexico as pilot regions and identify key points for further action. Econsense and the Wittenberg Center for Global Ethics jointly facilitate this initiative.

Public Perception of CSR and Communication Strategies (with UNICEPTA and Storymaker)

The workshop focused on how CSR activities can be communicated internally and externally. It discussed the questions such as, ‘Which internal and external communication channels do companies have?’, ‘Which are used for CSR activities?’, and ‘How to tell exciting CSR stories that journalists are interested in?’ It discussed storytelling techniques and principles to increase CSR visibility and acceptance.

SAP Idea Lab – Let’s Kick-off New CSR Projects! (with and supported by SAP)

As it is a key objective of the ‘More than a Market’ initiative to catalyze further social engagement of German companies, the IDEA LAB is the place to go to for support. It is an open format where participants work together to sketch and develop collaborative project ideas. In an interactive workshop using methodologies inspired by design thinking, participants are guided through the steps of generating ideas, developing concepts and/or prototyping a project on the topic of their interest.

"Global Compact - A Model for a China Commitment!" (with the German Council General)

After the workshops, the Forum concluded with a high-level panel discussion about the idea of localizing here in China, among the German business community, the United Nations’ ‘Global Compact‘. The Global Compact started in 2000 and has become the world’s gold standard in CSR. It is a call to companies, big and small, to align strategies and operations with universal principles on human rights, labor, environment, and anticorruption and to take action to advance these principles. The Consul General, moderating the discussion, stressed: “Globally, the majority of the companies adhering to the Global Compact are small and medium enterprises with less than 250 employees”.

Two company representatives form a large and a medium-sized company and two CSR experts discussed whether a similar but different public commitment of German companies in China to goals and values derived from the Global Compact could send a strong and visible message that German companies operating in China want to engage with their local communities as good corporate citizens.

Ms. Celina Chew, President of Bayer Greater China, said that for Bayer, the Global Compact was very relevant and helpful to stay focused on long- term sustainability in all the different operations of her business: 

“...we are adopting sustainability as really a part of our strategy not as an add-on to business.”

Mr. Christoph Kaiser, General Manager of Turck, a medium sized German family-led company, stated:

“We see that the advantages for us that we get much higher visibility for the activities we have been doing for years... We don’t need to hide, we are doing a lot - especially mid-sized companies are distributing more social activities than that of bigger companies - but we are not very good in communicating them. If we would establish this kind of China commitment, I believe there is a chance to show Chinese colleagues and international colleagues where we are and that we could motivate them to join the activities. Companies are not only buying our products because of the excellent engineering or technology. They also buy our products because of the very good reputation that they associate with German companies. I think a China Commitment could even further convince our customers that they are buying products from responsible companies. “

The German Chamber of Commerce in China and its partners hope that the Forum fostered new networks and new supporters of the More than a Market initiative. May the ideas developed during the workshops and panel discussions inspire new projects that carry the spirit of the initiative even further.

For more information and to find out how you can get involved, please visit www.morethanamarket.cn or contact Ms. Ines Sieckmann at sieckmann.ines@sh.china.ahk.de.

03 | 2017 | ORGANIZATIONAL EFFICIENCY

Foreword and full PDF

In recent years, China has reached a “new normal” in terms of its economic growth. Since its peak ten years ago, the country’s GDP has continuously dropped from 14 percent to under seven percent. Now, companies have to adapt to this new business environment and restructure themselves in order to stay competitive in such a fast-changing market. Therefore, increasing efficiency is the most central aspect in this context as it refers to the balance between input and output; thus, the accomplishment of business goals with a minimum expenditure of time and effort. In this edition of German Chamber Ticker, we will further analyze how to improve workspaces, particularly through co-working spaces, and how to make the most out of your resources. Furthermore, proven experts in their fields will illustrate different aspects of Lean Management and Industry 4.0, as well as provide a guideline to reorganize an organization.

Yours sincerely,

Bettina Schoen-Behanzin

Download the PDF here

Cover Story 1 - Breaking the Cycle

Leading Next Generation Organizations
by MICHAEL BABILON-TEUBENBACHER

It might seem that disruptive technologies and ongoing large-scale societal developments are putting us at the edge of a new economic world order. Still one would argue that certain economic developments are as predictable as the seasons:

1. (Initial) Dynamic and Growth: Phases of initial dynamics, investment, high levels of innovation and "letting it happen" are followed by

2. Consolidation: Phases of efficiency programs, broad-scale structural optimization and tightened control with those in turn followed by

3. Rediscovering Dynamics: Phases of releasing fresh entrepreneurial spirit within organizations having been numbed by either efficiency programs or tight central control and decision taking

For those organizations not getting stuck in phase two, the cycle ideally takes the form of an upward-facing spiral, thus resulting in slow but overall progress over the years. Still, obviously, this organizational "stop-and-go" leads to significant organizational abrasion - lost employees, lost motivation and lost profits. The staff experience journey becomes comparable to sitting in a car with the brake and the accelerator being hit fully in turn every 500 meters. Not a really nice experience for anyone who has been stuck in such kind of situation before.

 

Trapped in Organizational "Stop-and-Go"

Considering the above cycle, one might argue that the current hype on agility, swarm, self-organization, cross-functional teams and similar is less of a unique development rather than the consequence of decades of strict managerial control and efficiency orientation. What is unique though, is the speed and environmental complexity, which organizations and their leaders are undoubtedly facing. VUCA - volatility, uncertainty, complexity and ambiguity - and overall changing rules of the game decrease predictability and directly impact leader's ability to obtain information, to interpret, to act, to decide and to direct.

It’s not surprisingly very few leaders are nowadays talking about efficiency. Too much is at stake by missing out opportunities, losing market share or not investing into potential foundations for future economic success. Uncertainty on which foundation will be solid enough for the challenges to come, on what the best opportunities are and on who the biggest competitors will be is not a fertile breeding ground for companies to sustain themselves. Neither is it a good breeding ground for optimizing historically grown organizations and setups, tightening control and, squeezing out the last cent in the next savings initiative. The challenge is to investigate, break-up silos to try out, diversify, innovate and get outside of the corporate comfort zone.

Is this development bound to last or are they currently forcing staff into new ways of collaborating and working in creativity inspiring setups just to hit the brake once it turns out that the current broad-scale opportunity hunt is not sustainable? Wide ranges of startup initiatives are far from being profitable, tightening monetary policy is already visible on the horizon and organizational practice frequently shows that letting go of control is less an act of conviction rather than an act of following a trend or, even worse, an act of despair.

 

Fostering Entrepreneurial Spirit for Breaking the “Stop-and-Go” Cycle

One thing is for sure: The more dynamic and overwhelming frame conditions are, the more sanity and reason will be key in creating a competitive advantage for an enterprise. Some people might wonder what sanity and reason have to do with entrepreneurship. From experience, entrepreneurial mind-set is not only about seeking opportunities, driving innovation and jumping onto the next best investment opportunity. It is in fact much more about balancing short-term profits with long-term gains, about sustainably growing a business over an extended period in a smooth and continuous ride rather than in a frantic stop-and-go. It is about looking beyond the next quarter and even beyond the next year and foreclosing developments before they adversely affect enterprise operations.

The line between rediscovering organizational dynamics after a period of tight managerial control and simply kicking-off pointless shortsighted action is very narrow. After all, leaders need to keep fresh initiative alive not knowing what will come out of it while at the same time providing direction and guidance. Distinguishing promising investments from pointless action with confidence requires entrepreneurial skill and attitude as well as mental flexibility. Sadly, organizations disempowering and discouraging people from growing their own judgmental abilities have successfully numbed those, transforming entrepreneurial spirit into compliance and restraint-based thinking.

So, growing and fostering true entrepreneurial spirit is THE core leadership challenge in sustainably breaking the vicious "stop-and-go" cycle. Only employees who are in a position to take sound entrepreneurial decisions and who can handle the apparent contradiction between creating dynamics, and staying efficient are truly empowered staff who can achieve sustainable success for enterprises. So, key question for leaders is, how to promote entrepreneurial spirit amongst staff members who either have never even considered thinking entrepreneurial or who have lost their entrepreneurial thinking along their corporate journey.

 

Keeping Success, Sustainability and Satisfaction in Balance

No doubt, holistic entrepreneurial-spirit and judgmental ability are mindset-related. Building them up takes time and requires Cover Story considerable and consistent leadership effort across all levels. The underlying transformation is a journey touching the very core of enterprises including but not limited to values, leadership principles, steering mechanisms, evaluation systems, hierarchical structures and governance elements. Well targeted change management effort is necessary to realize this transformation effectively. And once the transformation is completed it just as well requires considerable effort to uphold entrepreneurial spirit against all odds.

Whereas the measures to be undertaken and the starting point for the transformational journey are very much dependent on the entrepreneurial circumstances, three elements have proven key in realizing the required mind-change, as simple as they might look at a first glance:

  • Trust: Albeit this is the most obvious element, it is at the same time the most difficult one to achieve. While trust is THE leadership skill required to drive organizational performance, the Holy Grail for establishing trust is yet to be discovered. A good starting point is to follow the core belief that people who are truly empowered – i.e. who have the knowledge / information, the skills and the authority to act autonomously – will do their very best to drive organizational success. Only the deployment of this key-attitude amongst leaders and staff members will lead to the establishment of a safe collaboration environment, which is the breeding ground for trustful relationships.

  • Overarching common vision: Making use of agile terminology, the overall “product” vision is key for empowering self-organized and cross-functional teams. Leaders and employees who have an in-depth shared understanding of where the enterprise journey is meant to go are less likely to waste time and money in areas that are not beneficial to the overall objectives. Rather they are very likely to drive initiatives autonomously, which pay off and support the overall goals. Keep in mind that sustainable deployment of a common vision is relying heavily on a consistent twoway- process. Only SHARED understanding creates the solid foundation for individual employees to take well-founded and aligned decisions.

  • Framework for well-balanced judgements: Particularly stock-listed companies frequently lack the ability to sacrifice short-term gains to long-term benefits. Accordingly, staff members face frameworks that do not permit to take well-balanced judgements. The key lies in proving leaders and staff with a framework that promotes well-balanced decision taking instead of dashing for the next quickest success. On the tangible side, such a framework comprises structural elements like a Balanced Scorecard for steering along the dimensions Success, Sustainability and Employee Satisfaction. On the soft side, such a framework comprises a diverse workforce which is engaged in an ongoing constructive dialogue on which opportunities to pursue and which opportunities to rather let go.

Dynamic and agile enterprise development and efficient operations are neither mutually exclusive nor are they necessarily consecutive organizational conditions in a stop-and-go cycle. Rather they are the result of continuous considerations and entrepreneurial dialogue, across all levels, on where to foster agility and organizational responsiveness and where to push for the next level of organizational efficiency. Upholding this dialogue MUST be a top leadership priority, by channeling it, moderating it or re-enforcing it.

Leading next generation organizations requires entrepreneurs with the ability to create safe environments with truly empowered people who share a common entrepreneurial vision and who have the ability to establish frameworks and teams leading to well-balanced judgements. This does sound like an ideal state and like a long-term vision, right? However, one would argue that it also sounds like a very attractive awakening from corporate numbness and running against the next upcoming efficiency stop sign.

 

Further information

Michael Babilon-Teubenbacher is General Manager of CPC Consulting (Beijing) Co., Ltd., the Chinese branch of a leading German Change Management Consultancy. He is heading China and Asian operations and has expertise in the fields of organizational development, program and project consulting in an international context. Mr. Babilon- Teubenbacher is certified Systemic Business Coach, ambassador for new Leadership Development as well as coach for Agile Project Management. He can be contacted via +86 18618366537 and m.teubenbacher@cpc-ag.de.

Cover Story 2 - Making the Most of Your Resources

Organizational Efficiency within a Shared Service Center Environment
by STEPHANIE RINKEL

In today’s world, companies strive for efficiency and effectiveness to accomplish its goal. An efficient organization implements its plans using the smallest possible expenditure of resources to generate high margins of profit.

When talking about production oriented business that produces tangible goods, the measure of efficiency connects to mathematical relationships between inputs and outputs; when the asset of an organization is the human capital, this relationship is not so clear and consequently the ability to accurately measure efficiency in a simple relationship between input and output is difficult. A proven example to discuss the organizational efficiency can be shown in an already well established shared service center, where the efficiency is of utmost important. During the last years, companies have centralized e.g. accounting services within their organizations, concentrating them in a shared service center environment to improve work efficiency, monitor and increase service levels and realize cost reductions. When talking about organizational efficiency in a shared service center environment, popular topics are: lean management, doing more with less resources, process/system improvement, and optimizing human resources. Hence, it’s worthwhile to dig into the methods companies use to improve the efficiencies and outputs.

 

Automation Changes the Mechanics of Operations

Companies have invested significantly in system automation (e.g. Robotics) to build a platform that support shared service operations. One of the best examples is the process of accounts payables (AP) auto posting (the automatic posting of an invoice) which proves to be the key in reducing costs within accounting.

In the healthcare industry, a good functioning HCP (Health Care Professional) program is important for business which fits academic needs. For medical representatives (Med Reps) within the pharmaceutical industry, a good program is the way to integrate medical communities, and interact with doctors and other industry players. Holding conferences where clinical cases and experiences are shared is a common practice in China. However, payments to HCP in China feature for a large volume, long cycle times in payments, and huge manual efforts (including manually calculating and posting of individual income tax as well as performing significant number of compliance checks) etc.

A way of implementing automation is to link existing systems that manage the whole life cycle of meetings & events for the healthcare industry to the well-established and globally used tools within the accounting area for auto posting. Developing the possibility to retrieve data from an existing CRM system that is linked to the company’s SAP system and automatically uses the data and coverts it into an automatic posting of an invoice is a good example of automation. Not only data is retrieved and used for several purposes (such as signing contracts between the parties within the HC industry, allowing compliance checks and initiating auto payments) it also:

  • Diminishes efforts for preparing paper-based documents, which is ecofriendly

  • Reduces workload within the legal department for preparing paper agreements

  • Eliminates manual posting workload, local compliance checks, and tax calculation

  • Shortens payment cycle time significantly

  • Scales down compliance risks by e.g. removing pre-chopped agreements and implementing system controls

  • Contributes to strategic analysis of HCP utilization

  • Increases transparency of HCP Speaker payments

  • Flattens payment status phone calls from hotlines

  • Has an appositive effect on the automation rate of the accounting services provided

 

Lean Changes the Way of Thinking and Behavior

As automation increases in importance, it is tempting to emphasize technology over other elements to improve efficiency. This approach can overcomplicate the implementation process and obscure the long-term goals. Establishing a lean management culture can be a good approach to run an organization that supports the concept of continuous improvement, a long-term approach that systematically seeks to achieve small, incremental changes in processes in order to improve efficiency and quality.

With the establishment of a Lean Management System (LMS), companies lay the foundation for a culture enabling each individual employee, both to reflect their own behavior and actions as well as the actions of the respective teams, with the intention to learn how to increase the organizational efficiency on a daily basis. LMS offers a selection of elements which can be applied anytime to improve collaboration within teams by every employee. Core elements of a learning culture are:

  • Creating transparency on activities in teams in order to avoid redundancy, to support each other and to manage workload

  • Providing/asking for feedback on a frequent basis and learning from each other, for example, by Activity Reviews or Best Practices exchange

  • Developing skills of employees systematically, for example, through Coaching in finding solutions in day-to-day business affairs,

  • Skill Management to ensure availability of functional skills within the team

  • Addressing problems and its causes openly in structured problem solving sessions along with working on solutions

  • Reviewing people and partner satisfaction as well as reviewing productivity KPIs within the team regularly with respective definition of appropriate measures

The KPI system (PPP) and KPI dialogue are two of the effective approaches to further use for information exchange and for tracking the status of overarching measures and problems. PPP stands for People (employee satisfaction), Partner (business partner satisfaction) and Productivity – and represents the three categories, for which KPIs are tracked on (at least) a monthly basis. KPIs can be both automatically extracted from applications/ databases (e.g., BW Dashboard) but also data/statements that are extracted through surveys.

The KPI dialogue is used to track the development of the Lean KPIs of the unit. Each participant comments on significant development of Lean KPIs within the respective team/department, and explains which new measures have launched (e.g. to address possible adverse developments).

The point of LMS and the learning culture is the open dialog between managers and employees as well as the dialog between team members. Options for improvements are perceived as opportunities to further develop the organizational efficiency, and people are empowered to contribute.

One of the key elements of LEAN Management by the design is the element of whiteboard sessions (WBS). Whiteboard sessions are a core part of the Team Performance Dialog. In such a session, all team members present their current activities, indicate when they have capacity issues or other problems, which require immediate assistance. Whiteboard sessions are the ideal platform to create transparency on activities in the team, list short-term tasks, identify problems and offer mutual help within the team. Teams, which operate at different sites, can use an electronic version of the whiteboard.

The sessions are well accepted, achieve more transparency and form part of a companies’ meeting culture.

It is important to find out how the application of each LMS element can contribute to the efficiency of an organizational unit. Applying Lean Management is not an end in itself. Rather, it should be a valuable support in dealing with daily tasks.

Innovation Changes the Culture of Continuous Improvement

In this world of rapid evolution, increasing competition and boundless opportunities, one of the objectives is to increase the work efficiency via continues improvement; innovation is the key to achieve it. A way to approach innovation within an organization and certainly within a shared service center environment is to establish an innovation network to unleash the full innovation potential of all employees in the organization.

An innovation network connects people across regions, functions, and divisions and provides skills and tools to drive local projects/innovation initiatives. An example seen among multinational companies shows the roles and responsibilities established within an innovation network:

  • Innovation Ambassadors - Passionate and committed business leaders who promote innovation in his/her country or function.

  • Innovation Coaches - Engaged employees who connect people, provide guidance and promote local activities.

  • Innovation Managers - Full-time experts for innovation, running programs & communities, trained in specific methodologies.

  • Innovation Committees - Senior Business Leaders who set Innovation Agenda, governing global initiatives to drive innovation in a sustainable manner.

Innovation is not only developing something new that creates value, but also a mindset, being curious and experimenting new things, challenging the status quo and asking why people are doing things as they do, and whether there are other ways to do it.

Current trends clearly show that companies are moving towards global business services (GBS) more and more to expand their scopes, moving up that value chain and committing to deliver added value services to their core businesses. Measures mentioned above are all about effectively unleashing people’s potential and building intellectual capital. This leads to increasing levels of innovation, participation and collaboration, as well as improved organizational performance and efficiency.

 

Further Information

Stephanie Rinkel is the Head of the Service Center Shanghai (SCS) of Bayer China Limited. SCS is part of the Shared Service Center Delivery Network (SSCDN), providing high quality Front and Back office accounting services to Bayer's companies in Greater China.

Cover Story 3 - Engaging Hearts

Raising Efficiency in the Human Economy
by CAROLIN HAN and VIVIEN YANG

It’s Tuesday morning and the first thing on Jane’s agenda is a meeting with a new customer. Being aware of this meeting’s importance, Jane put a great deal of effort into the preparation and is looking forward to presenting her ideas to the customer. After a successful meeting, Jane continues to work on a new sales proposal. Being fully immersed in her task, time flies and it is soon time for lunch. She is just about to leave her desk for her break, when an e-mail comes in – a customer complains about a payment issue gone wrong. Wishing to solve this problem immediately, she pops in to the accounting department and calls the customer back to tell him that his complaint is taken care of. “This job is challenging at times, but also very inspiring. I’m learning a lot on a professional and personal level,” Jane says. She identifies with and believes in her work knowing that it is a valuable contribution to her company’s success. Jane is what we call an ‘engaged employee’.

 

The Human Economy

Organizational efficiency – an organization’s degree of success in utilizing the least possible input in order to produce the greatest possible output – is a central imperative of our time. In a digitalized world, organizations are increasingly guided by quantifiable economic data with key performance indicators and rankings being in the center of management attention.

A common perception among business leaders is that technology will soon create greater value than people and give the desired uplift in efficiency. However, with changes in today’s world of work and the advent of the technological revolution we are entering "the human economy, which will be more about creating value with hired hearts," as author and business leader Dov Seidman puts it, and not machines or artificial intelligence. To run efficiently and compete effectively, organizations need engaged individuals like Jane, who thanks to their passion and dedication are willing to go the extra mile.

Engaged employees are highly energetic at work, fully immersed in their tasks and persistent even in the face of difficulties. While this is beneficial for employees themselves in terms of personal growth, it is also reflected in organizational outcomes such as higher productivity, higher profitability, and higher revenue. In addition, engaged employees show creative work behavior and high learning motivation, which is essential for companies to stay competitive in an innovation-driven environment.

 

The State of Workplace Engagement

According to the latest Gallup Global Workplace Report, merely 6% of Chinese workers are engaged in their jobs. Disengagement is not limited to certain job types or education levels – even among professional workers and managers work engagement is only 8%. Considering that engagement is strongly related to workplace productivity, these alarming numbers correspond well to the results of Ernst & Young’s ‘China Productivity Pulse’ (2014) which shows that Chinese office workers spend only 52% of their working day on what they consider to be productive work.

The authors were particularly interested in the level of work engagement among Chinese young professionals, a group of importance for organizations in our business community. Using the Utrecht Work Engagement Scale, an established scale measuring the three dimensions of work engagement, i.e. vigor, dedication, and absorption, they conducted a survey among 47 young professionals with a Master’s degree in Management from a top Chinese university and an average work experience of three years. The relatively new concept of work engagement originates from positive psychology research and differs from employee engagement as measured by the Gallup Institute in that it focuses purely on the employees’ connection to their work itself instead of their connection to the organization.

The research showed that:

  • Young professionals show a moderate level of work engagement (average of 4.5 on a scale from 1-7)

  • A third of the surveyed young professionals are planning to change to a job in another organization within the next twelve months

  • Those with low work engagement show a significantly higher turnover intention than those with high work engagement

 

Drivers Behind Work Engagement

It is known that work engagement is related to employee turnover and bottom line outcomes such as productivity, client satisfaction, and financial returns. What is less known though is how to increase engagement among employees so that their attitudes and behavior have a positive impact on organizational outcomes. Psychological research concludes that a key to work engagement is to strengthen employees’ job resources which support them in achieving their workrelated goals and stimulate their personal growth. Examples include job characteristics such as task variety or autonomy, but also support by colleagues or supervisory coaching.

The research showed that:

  • The most engaged employees are especially driven by having the ability to create value through their work, working atmosphere, and productive teamwork

  • The least engaged employees criticize a lack of challenge and creativity in their work, long working hours, and a low salary

To conclude, work content that is perceived as meaningful and challenging by the employee appears to be an important driver of work engagement, while a supportive social environment at work seems to boost engagement to above average levels.

Actions for HR Professionals and Leaders

Talk to employees. Actions targeting work engagement must fit an employee’s abilities and preferences, so it is essential to involve them. Acknowledging their view means recognizing them as individuals with different goals, which can already have a motivating effect on its own. How? First talk to your employees about their personal goals and resource needs. Then implement changes or set development goals.

Redesign jobs. More organizations expect their employees to be proactive and to take responsibilities, but they should create the opportunities for their employees to live this potential. Job redesign strategies can increase work engagement and foster personal development by offering new challenges. How? Give your employees more responsibility and autonomy. Extend their task areas through job enlargement. You can start small-scale with daily tasks or small projects.

Create a collaborative environment. As reflected in the survey, the most engaged participants especially appreciate their positive work environment fostering collaboration and team work. Indeed, social interactions with others can be a valuable resource at work and some companies succeeded to create environments that allow people to meet, help and give feedback. How? For example, Daimler Trucks North America recently changed from large cubicles with high walls to open office spaces to encourage employee connection. As Daimler reports, providing more common spaces supports spontaneous encounters and team work, resulting in an exponential increase of employee interaction.

Activate self-efficacy. "Whether you think you can, or you think you can’t – you’re right." As phrased by Henry Ford, self-efficacy is a powerful belief and an important driver of work engagement. Employees that believe they can reach their goals are more willing to engage in their work, thus more likely to actually reach their goals. Successes will in turn fuel their belief in their own capabilities, which is why organizations should aim at setting this positive gain spiral in motion. How? Set goals that are ambitious, but still achievable. Coach and encourage your employees. Use role models. Ensure mastery experiences. Recognize employees’ successes.

Be a transformational leader. As work engagement is about putting your heart into your work, leaders are advised to adopt a transformational leadership style instead of only focusing on the functional part of what should be done. How? Highlight for employees why their work matters. Be a role model and ‘walk the talk’. Set high expectations, but provide support. Maintain trustful relationships with employees.

Prototype and learn from feedback. For employees, their work itself, social encounters, and personal successes integrate into one single experience that determines how they feel, think, and behave while working. Consequently, companies should iteratively develop the whole employee experience. How? Use human-centered approaches such as design thinking. Prototype measures to see what works, learn from feedback and improve again.

 

The Key to Efficiency in the Human Economy

As the authors‘ research and recommended actions suggest, an organizational focus on efficiency may not be the key to efficiency in the human economy. Indeed, too much emphasis on trimming organizational structures for efficiency may leave employees disengaged and, therefore, inefficient. Instead, the key to efficiency in the human economy is to engage your employees and to create an environment in which they can thrive.

 

Further Information

Carolin Han is Head of Learning & Development at Han Executive Advisory & Development (H-EAD.com). She studied International Business and Management (BBA, Dipl.-Betriebsw. (FH)) in the Netherlands and Germany. She also studied Organizational Psychology (MSc) at the University of London, UK. H-EAD provides solutions for executive development and management diagnostics.

Vivien Yang has worked for BASF and Thales in the fields of employee development and change management. She studied Psychology (BSc) at the University of Heidelberg in Germany.

Cover Story 4 - A Space for All

How Co-working Can Help Improve a Company's Organizational Efficiency
by NICK WITHYCOMBE

The almost homographic terms organizational effectiveness and organizational efficiency can differ greatly. Organizational effectiveness simply measures whether the goal was achieved, while organizational efficiency heeds to budget, economy of usage and balances input with output. While the terms are supposed to be different, in the case of HR and of having an office, they are one and the same; the goal of the effectiveness is to be as efficient as possible with available resources. When efficiency is the word, co-working is the answer for many companies. While the sound and the reputation of this may still conjure brand images of youths lounging on sofas and prompt words such as “millennial” and even worse, “hipster”, it’s vital to know that some companies that use co-working spaces include Microsoft, AB InBev, The Guardian and many more Fortune 500 companies.

What was ‘Co-working’ and What Has It Become?

Co-working finds its roots from the same era of ‘hackerspaces’ in the mid-1990s. Open workplaces provided somewhere for digital experts to physically congregate in order to share ideas and thoughts. It was alleged that Brian DeKoven, a game designer, coined the term ‘co-working’ in 1999, having identified the collaborative style of such places.

The first officially declared co-working space was known as the San Francisco Co-working Space, a not for profit cooperative which saw the value of giving an alternative work community a place with structure and managed community to go alongside their freer and more flexible working lives.

With just 75 known co-working spaces a few years later, it was from 2011 to 2015 that the number of co-working spaces around the world increased by nearly 700%. According to the latest annual Global Co-Working Survey, in 2017 more than one million people will work in a co-working space, with over 14,000 venues worldwide.

This rapid expansion proves co-working popularity and therefore effectiveness at giving enterprises of any size, from one person to hundreds, the optimal working space.

While growth of the co-working industry is enormous, and in some senses the years it has been successful for is a long time in today's pace of information understanding, it is still necessary to explain what co-working is not. Co-working is not incubating start-ups, it isn’t focused solely on tech companies, and co-working isn’t only for small companies.

No company of any size can afford to be left behind - especially foreign companies in China, where the need to stay ahead of the game is more critical than ever. Co-working spaces can solve many problems for both companies and entrepreneurs entering a new market. The simple avoidance of having to deal with setting up tenancy agreements, Wi-Fi, cleaning staff, furniture and more are gone in a second.

Thereafter, immediate connectivity to fellow innovative companies and mindsets within the same co-working space is a networking goldmine. Co-working spaces provide an instant welcome into the professional community of Shanghai and there are further diverse benefits to maximize organizational efficiency.

Efficiency Defined

The author spoke to Dominic Penaloza, Chief Innovation Officer at naked Hub, who broke down the proposition in terms of efficiency. "Imagine an office building housing 100 small and medium sized companies. In a traditional office this would mean 100 front desks, around 100 meeting rooms, 100 printers, 100 WIFI setups, 100 pantries and 100 water coolers. In a co-working office, this would mean one front desk, around 4 to 6 meeting rooms plus several meeting spaces, a few printers and one WIFI setup. The cost savings come from needing less total real estate, fewer assets, and a much higher utilization of space. And that’s only accounting for the real estate and physical assets. Co-working also optimizes the 100 procurement processes for a total of 500–600 desks and chairs; now simplified to one procurement process for all the desks and chairs."

The Myriad Benefits Throughout Co-working

Organizational efficiency can capture many topics of co-working. The efficiency not only arrives in terms of visible benefits for the ones and zeros of the accounting sheet, but it is a proven method to achieve further objectives, essentially at no extra cost. A good business needs to consider how to use resources to retain talent - i.e. keep key employees happy. Co-working achieves that by simply offering them a much nicer place to work.

Co-working is so powerful because it enables each member to enjoy both the superior economics and user experience. Every employee of the company and thus, the business itself gains not only in happiness quotient of being in a physical space that has a cool design and avantgarde feeling, but the community aspect of true co-working spaces leads to new contacts, customers, and business partners.

If this value proposition of economics and superior user experience sounds familiar, that’s because it is found in other industries within the sharing economy such as ride sharing services like Uber and Didi or home sharing services like Airbnb. Since almost everyone would choose better service at lower costs, these new sharing-driven models are rapidly gaining market share and disrupting massive traditional industries like ground transport, residential real estate and commercial real estate.

Retaining Talent

A report last year from Emergent Research confirmed that turnover costs associated with recruitment, training, lowered productivity and lost expertise are distinct. It was found that the mean average cost of replacing one employee is a full one-third of the annual salary of hiring a new person, as stated in the report’s US Labor Department statistics. Some estimates came in at much higher: a study by the Society for Human Resources Management (SHRM), stated that the process of hiring a new employee can cost between six to nine months’ salary.

Only 13% of employees worldwide are engaged at work, according to a 142-country study of 180 million employees conducted by Gallup in 2013. In the survey, 87% of respondents reported that they were either ‘not engaged’, meaning they lacked motivation and were less likely to invest discretionary effort in organizational goals or outcomes, or were ‘actively disengaged’, indicating they were unhappy and unproductive at work.

Most companies don’t have the resources of either budget or time to painstakingly create a ‘Google Campus experience’ in their offices space. As one example, naked Hub does. With Co-Founder of naked Group, Delphine Yip-Horsfield having a decades-long background in design, sharing world class design skill is an enormous benefit of naked Hubs. The best co-working spaces offer innovative workspace design which fosters collaboration and creativity at a higher level of quality than any individual company would be able to do by themselves. Smart founders are beginning to realize that co-working enables them to offer many of the work environment perks seen at top talent magnets like Apple and Google.

Undeniable Productivity

Citrix’s research with the Centre for Economics and Business Research into the potential economic impact of a more widespread ‘work from anywhere’ culture found that the UK could gain the equivalent of 0.7% of GDP through more productive use of available working hours away from the traditional office space.

The study also revealed that flexible working allowances could potentially save workers £7.1 billion in reduced commuting costs and over half a billion hours spent travelling. Microsoft opt for co-working, with their director of Microsoft UK, Rich Ellis, quoted as seeing co-working as obvious to modern day needs.

‘Gone are the days when we needed to be chained to our desks between the hours of 9am and 5pm, or clock in and out as proof of a day’s productivity,’ he said. ‘Technology solutions such as collaboration tools and the cloud have given us the ability to work from where we want, when we want – and many businesses are already reaping the productivity benefits of this, encouraging employees to work in the best environment for them and embracing new solutions such as co-working spaces to enable this.’

Maximizing Existing Real Estate Efficiency

Besides fitting in to existing co-working spaces, large corporations could consider using their existing space for co-working, thus creating an extra revenue stream in these otherwise unused pockets of space. Organizations have adopted co-working in a variety of ways, adapting the style to suit their particular needs, while other companies have launched satellite offices or incubators at existing co-working spaces, enabling employees to collaborate with outside partners, researchers and customers on a consistent basis.

The Tool to Achieve Efficiency

Co-working is the ultimate way of organizational efficiency, if your goal is to obtain the most desirable office space at the lowest cost. Basic functional tasks such as procuring furniture, monitoring the internet and organizing the lease are at minimal or zero effort. Even the time spent choosing the right location is gone, as premium co-working spaces have already undergone this labyrinthian project. Thereafter, tick every box on the company list by pleasing employees, staying in touch with the local working community and on the pulse of the city’s business scene – achieved at a proven rate of the lowest expenditure possible.

Further Information

Nick Withycombe has lived in Shanghai for 15 years, and has written for many of the city's media publications. He believes in co-working and can usually be found drinking delicious green tea at naked Hubs around the city.

About naked Hub: naked Hub is work redesigned. Their innovative and beautiful workspaces are home to a diverse community of companies and individuals who interact, collaborate, and do business with one another. Offering unprecedented freedom, financial flexibility, and an invaluable online-to-offline community, naked Hub is a platform designed to help start-ups, SMEs and MNCs across all industries, to increase their success in business. Find them online at www.nakedhub.com.

Cover Story 5 - Increase Productivity Step-by-Step

How Industrie 4.0 Can Streamline Output
by XIAOLONG HU

 

Companies on the Path to Industrie 4.0

The future of manufacturing has been summarized by the term “Industrie 4.0” for quite some time now: by means of networked manufacturing, workpieces and manufacturing equipment can communicate with each other making it possible to manufacture individual products under the same conditions as mass production. Core requirements for implementing this vision are continuous IT and a high level of automation.

 

Industrie 4.0 – Internet on the Shop Floor

There is no lack of definitions and explanations regarding the term “Industrie 4.0”. The complexity of Industrie 4.0 and the many different players that are involved generates uncertainty, as soon as the detailed contents are considered. At the same time, the meaning of the so-called 4th Industrial Revolution can be traced very easily. Basically, the steam engine was the key technology in the first Industrial Revolution, electric power characterized the second Industrial Revolution, and automation through computers was the premise of the third Industrial Revolution. It is often forgotten that the computer in manufacturing – on the shop floor – was the key characteristic of the third Industrial Revolution. Many published examples of Industrie 4.0 depict scenarios representing Industry 3.x, rather than Industrie 4.0.

The core of the fourth Industrial Revolution is now marked by the arrival of the internet on the shop floor! The networked products and decision making processes, also known as Cyber-Physical Systems, practically control entire value chain networks in real-time. This is facilitated through workpieces and manufacturing equipment that are digitally linked through IP addresses and are able to communicate with each other.

 

First Computers, Then the Internet: from Industrie 3.x to 4.0

Companies will only invest in Industrie 4.0 if they see a clear benefit such as a significant increase in productivity. For this to happen, Industrie 4.0 – internet on the shop floor – does not have to be focused on immediately. However, every manufacturing company should have the goal of realizing Industry 3.x and continuously integrating computers and automation technologies. Many companies lack knowledge of technologies that currently exist. IT penetration is a necessary prerequisite for the next steps. This goal can be addressed immediately so that fast success is possible in terms of productivity.

Three steps are necessary in order to increase the level of automation and IT penetration. First, business IT areas such as CRM, ERP, MES and PDM systems must be expanded into a continuous IT landscape. Furthermore, control and automation technologies should be consistently utilized to manage efficient manufacturing. Then, it is necessary to link the business IT (office floor) with the shop floor operating technologies (OT) because long-term merging of the flow of materials and information can only be achieved using a continuous IT/OT architecture.

 

What Really Matters: A Three-point Plan for Tomorrow’s Manufacturing

To ensure long-term competitive advantages in networked manufacturing, special Industrie 4.0 information architectures are required that take the following requirements into consideration.

 

  • Vertical integration and networked manufacturing systems 

In most companies, the automation pyramid is still characterized by strictly hierarchical communication structures and differentiated levels. However, Industrie 4.0 architectures must provide a link from business management levels to the operations, process and control levels, and to the field. Plug-and-produce modules for manufacturing, planning of optimized manufacturing and control in customer cycles with the option for adhoc networking in products and resources are all examples of prerequisites that are required in order to realize customer-specific business and manufacturing processes. In order to accomplish this, it is imperative that the IT systems of the corporate management level (office floor) be networked with the manufacturing systems (shop floor), allowing them to communicate with each other without barriers or media disruptions (compare Fig.1).

  • Horizontal integration through value-added networks 

The so-called horizontal integration through value-added networks concerns various areas: networking the manufacturing systems into a manufacturing complex, networking within the scope of the supply chain, as well as networking and involvement of the customer. Demand-oriented manufacturing is characterized by its high level of flexibility and networking in the individual manufacturing facilities; there is an optimized flow of material and information along the value chain in which the customer is involved. Inventory controlled supply is replaced by continuous and demand-controlled supply (Smart Sourcing). Manufacturing and manufacturing supply are self-controlled using intelligent automated equipment (Smart Planning). The integration of the processes is ensured, including the logistics to the customer (Smart Distribution) (compare Fig. 2).

  • Continuous engineering throughout the entire lifecycle 

Skills from different engineering disciplines are required in order to realize these types of horizontal and vertical network architectures. This complexity can be countered with systems engineering. It provides basic methods to describe and plan the integration of product and manufacturing resource planning into an overall system. However, these skills are not yet present in many companies. Moreover, engineering is operated from two perspectives: the engineer’s perspective and hardware and software development.

There are already various architecture models that take the mentioned characteristics into consideration. Every one of these models addresses different target groups. The practical implementations of new architectures will reveal which models are appropriate for industries and companies.

 

Implement Industrie 4.0 Now

Industrie 4.0 is a major topic of current interest. The challenges are clear and every manufacturing company should address these topics. The current situation in industry can be compared to that in commercial sector 15 years ago. The internet threatened established business models here as well. Just as then, there are also skeptics today who perceive the internet movement as unsubstantiated hype by lunatics – and there will be winners and losers this time too. Today, the winners in commercial sector are eBay, Amazon and Zalando. Industrial companies should not miss out on bringing the internet into their businesses if they still want to remain competitive in the future.

 

Further Information

Xiaolong Hu grew up in China, studied at the University of Hannover and has spent many years living in Germany. As the managing director of UNITY in China, he focuses on Industrie 4.0 strategies, innovation management, operational excellence as well as managing large implementation projects in a cross-cultural context.

About UNITY: UNITY is the management consultancy for future-oriented corporate management. With 210 employees, they are present at 14 locations worldwide and lead projects around the globe.

Cover Story 6 - Why, Where, What

Designing Tomorrow‘s Organization Needs Clear Answers Today
by AXEL KUHLMANN

In today‘s VUCA (Volatility, Uncertainty, Complexity, Ambiguity) world, many organizations feel the pressure to change and overcome traditional structures. Their wish: An organization which works well with all existing and new challenges, the known, and the unknown. Many times, a couple of aspects are underestimated. This can be dangerous; so it is important to talk about fundamental questions one should put into consideration before starting.

 

Is the Organization Ready?
Is the organization clear where it is today, where it wants to go, and how the future organization will work?

These are some questions which one may reflect on when building an organization for tomorrow. Answers are fundamental because they will drive actions in an organizational change process. If the “A"(today’s state) and "B"(desired state) are unknown, there is no direction. Without direction, where shall people move to? The defined direction itself might be the strategy. Strategy and design of the organization are strongly related. First, have a clear strategy and clarify with all stakeholders in the organization.

If one is going to design a new organization, clarity is highly important. Clarity can create trust and offers an opportunity for team reflection. This may lead to questions. But, if well thought through, many questions can be answered. Those which cannot be answered immediately may have the potential for further improvements. Organizations (management) who misses these questions will most likely face some unknown realities and underlying mental models later. It is not about letting people decide the overall strategy, this is a job for the top management circle. It´s about including and activating the human capital layers of the organizations and its knowledge.

In the starting phase, it can be useful to create some clarity through diagnostic tools. It can be a neutral tool, used anonymously, and in various scale. It should be chosen carefully to fit the organization, industry, and purpose. Some consultancies offer ready-made solutions, which can be customized to fit the organization’s needs. It´s good to be clear about the intended change first and then talk about the assessment. Maybe the company has a tool in-house already. The results will indicate where the organization is (this should be used frequently because one can see the progression) and may offer some information on which existing ground the organization can use and where the focus should be. It is good to use parts of the existing culture to keep the organization "rooted".

The situation is different if an organization deliberately chooses to change in a phase of strength or if they are forced to change to survive. "Change yourself before you get changed" is the phrase that managers should bear in mind. From the driver seat, one can create their own future at their own pace. In addition, the chance for a successful transition is much greater.

 

Are All People in the Driver Seat Clearly on the Same Page?
Do all relevant parties have the same understanding what the result should be? When shall be what accomplished? How to get there?

Things can become tricky during this phase. Change processes and milestones are often defined and described in a document. Then the team will experience a slowdown, get stuck, emotions turn into disappointment, energy goes down and people spend less and less effort for the change. Some people may even refuse. And these are only the feelings of the top-management team, not the levels underneath.

There are many reasons why the team might feel this way. For example, there was no "re-briefing" from the involved managers to ensure they got the right idea. People worked in the way that they understood and assumed that everything was clear. Managers should insure a proper delegation process and let their employees reiterate the process. If one hears and repeats the same story that was told, they understood. If they repeat and there are differences, make sure to clarify.

Another reason for misunderstanding may be that processes and rules for leadership were not communicated clearly. This is crucial when it comes to the levels of work forces who are not included in the very initial meetings. Even though managers have different communication styles, it should be clear that their teams understand the information correctly. They should ask for feedback and listen to what the team understood (same as above). By cascading down in the levels of organization, it is ensured that there are ears open to hear all concerns.

 

WHY Does the Company Need Organizational Change?

Maybe employees will not understand at first why change needs to happen. But, they need to support the change process. Understanding why things are going to happen (e.g. change of business environment, new opportunities, new challenges etc.) is an important driver in the process.

Often organizations lack early involvement from all levels and don’t realize that questions may arise in the different departments. They forget that these people are the organization that is going through the change. It´s the company’s human capital that should join the process proactively. The more agents of change created, the better for creating a critical mass.

 

WHAT are Roles and Responsibilities in the Process?
Who has the right capabilities to fill the role?

Having the right people in the right place sounds like a task easier said than done. To transitioning from "A" to "B", one must have an idea of what "B" needs. Once the future state and roles are clarified, one must start to look for the right person in the organization. Experience shows that some positions may have many roles and functions. The challenge is that during the company’s transition, a person might have one function but fits in one that is better suited for them. Of course, this can cause conflicts. Therefore, the transition of individuals demands an elevated level of leadership, communication, and time. Organizations with unclear, inactive, outdated, or no leadership models may have problems during this process.

Currently, the word "agile" is often used to describe future organization. This is more of a way of working together than a structure. It needs a specific mindset and developed leadership which adheres to an ability to let go traditional, hierarchical behaviors. Flexibility paired with accountability and collaboration are key. A diagnosis tool should cover personal analytical aspects to uncover the strengths and weaknesses of people and find the pillars one can build on.

 

HOW Can Execution Be Ensured and Supported?

Some methods can help view progress as well as approaching issues. Visible progress can be celebrated which motivates and reinforces the progress towards the goals. On the other hand, one can see in the early stages where hurdles arise and create diversions. As mentioned before, a diagnosis tool is both an analysis of the starting point as well as a reflector of the new state. While people are responsible for execution, technology can help them measure progress. It´s obvious that milestones must be set in a well-planned project.

 

WHAT Does Your Future Organizational Map Look Like?
What are the interconnections and interdependencies?

The future organization design may look more like a network of projects where resources (functions) are grouped around a task. This can be depicted in a map. Showing a drawing of future workflows may help clarify the desired state and the difference to today’s likely "Silo" thinking and acting. Visualization helps people "see the future".

Answers to these questions, having a strong, open-minded leadership in place and defining a complementing assessment tools can make sure that the organization (system) and it´s people (elements) are ready before you start. Activating human capital will potentially support people engagement. Acknowledge that organizational design is about working on structure and mindset. Mapping out and visualizing the processes might be an effective way to show the future. Taking these actions takes time and some courage, but will pay off later.

 

Further Information

Axel Kuhlmann is the managing director at akcc (SH & HK) Ltd. He has worked 24 years in leadership and executive positions in MNCs and SMEs with national and international teams and Clients. Since 2010, he has worked as an executive coach and in 2013 he established akcc Ltd. akcc Ltd. is a consultancy for organizational and personal development in areas like leadership, change, learning organizations, systems thinking. Mr. Kuhlmann is certified systemic management coach smc® and serves as the president of the Shanghai Coaching Circle, a non-profit organization of 200 freelance professional coaches. akcc works with international Clients in China and around Asia. Clients are SME´s and MNC´s in different industries including Automotive, Transportation, Logistics, Beverage, and Business/Office Supply.

Features 1 - Know Your Rights

China Introduces New General Rules of Civil Law
by DR. ULRIKE GLUECK and MICHAEL MUNZINGER

On 15th March 2017, the National People's Congress of the People's Republic of China (“PRC”) adopted the long-anticipated PRC General Rules of Civil Law ( 中华人民共和国民法总则) (“GRCL”) which will enter into effect on 1st October 2017.

The GRCL will be the first part of a codified PRC civil code which is planned to be finalized by 2020. Similar as codified civil codes of other jurisdictions (e.g. the German Civil Code, BGB), the GRCL contain general legal provisions which apply also for the additional upcoming parts of the future PRC civil code, i.e. chapters regarding contract law, property law, torts law, matrimonial and family law as well as the law of succession.

The GRCL are divided into 11 chapters:

(1) General Provisions

(2) Natural Persons

(3) Legal Persons

(4) Non-incorporated Organizations

(5) Civil Rights

(6) Civil Legal Acts

(7) Agency

(8) Civil Liability

(9) Limitation of Action

(10) Calculation of Time Periods

(11) Supplementary Provisions

Most of these topics are currently governed by the PRC General Principles of Civil Law ( 中华人民共和国民法通则) (“GPCL”) which have entered into effect on 1st January 1987. Other than it may be expected, the GRCL will not replace the GPCL when they enter into effect. To the contrary, the GPCL will remain effective to the extent that their stipulations do not conflict with the GRCL. In case of such a conflict, the stipulations of the more recent GRCL prevail.

In the following, we highlight some key provisions of the GRCL and relevant differences to the GPCL:

 

General Provisions

  • In addition to the principles of equality, voluntariness, good faith and honesty as already referred to in the GPCL, Article 9 of the GRCL now rather vaguely stipulates that all civil subjects engaging in civil activities shall help to save the resources and to protect the ecological environment. The GRCL do not contain further stipulations in this regard and details are subject to special laws and regulations.

  • Further, civil disputes shall now, in the absence of relevant legal provisions, be solved according to customs provided that the public order and good morals are not violated. Before, reference to customs was only made in the PRC Contract Law for quality and packing requirements.

 

Regarding Natural Persons, the GRCL Bring the Following Novelties:

  • A not yet born fetus shall now be deemed to have the capacity for civil rights for certain matters regarding the protection of the fetus’ interests, such as inheritance and accepting gifts. However, if the fetus is not born alive, it shall be deemed as non-existing from the beginning.

  • The age for minors having limited capacity for civil conduct, i.e. being able to perform civil legal acts which are exclusively to their (legal) advantage or which are compatible with their age and intellectual development, is lowered from 10 to 8 years (however, not to 6 years as it was discussed before).

  • The stipulations regarding guardianship have been reformed and are more detailed than under the GPCL. Inter alia, it is now emphasized that parents shall foster, educate and protect their minor children and that, vice versa, adult children shall support, assist and protect their parents.

Further, adults with full capacity for civil conduct may now determine close relatives, other individuals or organizations which are willing to act as a guardian in writing. In case such an adult (partly) loses his or her capacity for civil conduct, the guardian so determined shall become such adult’s guardian. This brings along more self-determination for people (partly) losing their capacity for civil conduct.

 

Legal Persons

  • Legal persons are classified into three categories: profit oriented legal persons, non-profit-oriented legal persons and special legal persons. The latter ones refer to organs, rural collective economic organizations, urban and rural cooperative economic organizations and grass-roots self-governing mass organizations, such as neighborhood committees or village committees.

  • Sole proprietor ship enterprises, partnership enterprises and professional service organizations not qualified as a legal person are so-called non-incorporated organizations. Non-incorporated organizations are no legal persons but nevertheless able to engage in civil activities in their own name. The investors or founders of non-incorporated organizations shall generally assume unlimited liability for the liabilities and debts of non-incorporated organizations. The last point is an important difference to limited liability companies, where the liability of the investors or founders is generally limited to the amount of their contribution to the registered capital of the limited liability company.

 

Civil Rights

The GRCL now expressly deal with the protection of the personal data of individuals and stipulate that the personal information of a natural person is protected by the law. Any organization or individual obtaining personal information of others must ensure the safety of such personal information, and shall not illegally collect, use, process or transmit such personal information, or illegally buy or sell, provide or make public such personal information. The GRCL also refer to general data protection and “online virtual property”, however, details in this regard are left to special laws and regulations.

 

Civil Legal Acts

According to the stipulations of the GRCL, civil legal acts can be null and void, provisionally invalid (i.e. their validity depends on the consent or acknowledgment of the respective agent ad litem) and revocable.

  • While the GPCL provided that a party may request a People's Court or an arbitration institution to alter or revoke civil acts which are obviously unfair, according to the GRCL, a People's Court or an arbitration institution shall now only be entitled to revoke such an act.

  • The GRCL shorten the one year period for revocation in case of a substantial misunderstanding as stated in the PRC Contract Law to 3 months, starting from the date when the party concerned knows or should have known the cause for revocation. This produces legal certainty faster.

  • The GRCL further provide that if the party concerned has not exercised the right of revocation within five years from the date when the civil legal act was performed, the right of revocation shall, in any case, be forfeited.

 

Agency

The GRCL differ between entrusted and statutory agents. Agents appointed by a People’s Court or an appointing unit, as referred to in the GPCL, are not dealt with anymore in the GRCL.

  • Article 168 of the GRCL deals with self-dealings of an agent. An agent shall not perform a civil legal act in the name of the principal with himself or herself, unless such act is consented or acknowledged by the principal. The same applies for the performance of a civil legal act in the name of the principal with another party who entrusted the same agent simultaneously.

  • In practice, it is advisable that the representative of an entity obtains the prior written consent of such entity’s competent authority if he or she intends to perform a civil legal act with himself or herself or with another principle he or she acts for.

  • According to Article 170 of the GRCL, where persons performing work tasks for a legal person perform civil legal acts related to their scope of functions and powers in the name of the legal person, such acts shall be binding on such legal person. Any restrictions imposed by the legal person on the scope of functions and powers of persons performing work tasks for the legal person are no valid defense against bona fide third parties. The same applies for persons acting for non incorporated organizations.

  • Article 172 of the GRCL deals with apparent agency. Nearly identical to Article 49 of the PRC Contract Law, it is stipulated that if any act of agency continually performed by an actor without the power of agency, beyond the scope of his or her power of agency or after his or her power of agency has expired, such act of agency shall be valid if the other party is in good faith, i.e. has reasons to believe that the actor has power of agency.

In order to avoid cases of Articles 170 and 172 of the GRCL, companies should implement respective corporate governance rules such as management by-laws and rules on the use of company seals, and make sure that powers of attorneys are appropriately limited and revoked, if necessary together with notifying business partners or the public. Further, companies should make sure that the respective information on their directors and managers as visible from the online database of the company’s registration authority are always correct and up-to-date.

 

Civil Liability

  • Articles 177 et seq. of the GRCL contain general stipulations on civil liability, joint liability of more than one person and the different ways of assuming civil liability.

  • Article 181 of the GRCL stipulates that a person who causes harm in exercising a justifiable defense shall not bear civil liability. However, civil liability on a reasonable basis shall be borne if such justifiable defense exceeds the limit of necessity and undue harm is caused.

  • Article 184 of the GRCL which is sometimes referred to as the Good Samaritan Provision by the media and legal commentators, provides that a person who causes harm to someone in volunteering to provide emergency assistance shall not bear any civil liability. This stipulation has been introduced in order to strengthen civil courage in the PRC. There have been multiple incidents in the past years where by-standers did not help in emergency situations due to their fear of being held responsible and being sued by the victims they had provided aid to. Previous draft versions of this clause contained the reservation that the helper could be held liable for gross negligence. However, such reservation has not made it into the final version of the GRCL. Whether this means that helpers shall indeed not be liable for (obvious) cases of gross negligence or even intent is doubtful. It is to be expected that future judicial practice or guidance brings clarity in this regard.

  • Article 185 of the GRCL now stipulates that a person who damages the social and public interests by infringing the name, portrait, reputation and honor of a hero or a martyr shall bear civil liability. Maybe the vagueness of this stipulation is deliberate in order to have a general, rather political statement in the GRCL and a broad catch-it-all clause. However, it is to be hoped that future judicial practice or interpretations bring further guidance on various issues regarding this clause. Who are heroes or martyrs? Under which circumstances are the social and public interests damaged? How are damages measured and who shall be entitled to sue?

 

Statute of Limitation

One of the most important changes compared to the GPCL which will have a major practical impact on all contractual claims which are governed by PRC law is the extension of the general limitation of action from two to three years.

  • According to Article 188 of the GRCL, such newly introduced three years period applies, unless otherwise provided by law.

1.Article 129 of the PRC Contract Law sets a four-year period for disputes arising in relation to a contract for the international sale of goods and for contracts regarding technology imports and exports. In our opinion, the four-year period stipulated in Article 129 of the PRC Contract Law constitutes an exception as referred to in Article 188 of the GRCL and remains applicable after the entry into effect of the GRCL.

2.According to Article 196 of the GRCL, the statute of limitation does generally not apply for (i) claims for ceasing infringements, removing obstacles or eliminating danger, (ii) claims of a creditor for returning real estate property and registered immovable property, (iii) claims for payment of alimonies, support money or maintenance fees and other claims for which the institute of statute of limitation shall not be applicable.

  • Same as already now according to the respective provisions of the PRC Supreme People’s Court, the stipulations regarding a limitation of action under the GRCL are mandatory and not subject to agreement between the parties. Also, a prior waiver of the benefits derived from a limitation of action is invalid. However, e.g., the warranty period in sales contracts for quality defects is subject to the agreement of the parties. Thus, it is possible to effectively stipulate a warranty period which is shorter than the general statute of limitation period.

In conclusion, the GRCL are an important step for the goal of having a codified PRC civil code in the near future. The GRCL also introduce some important amendments, such as for limitation of actions. Thus, any entity operating or engaging in business activities in the PRC should take note of the new regulation.

 

Further Information

Dr. Ulrike Glueck is the managing partner of CMS, China. CMS advise in the areas of corporate and M&A, distribution and commercial, employment, banking and finance, insurance, competition, real estate and construction, IP, dispute resolution as well as tax and customs. They have been active in China for more than 30 years. Dr. Glueck can be contacted via: ulrike.glueck@cmslegal.cn.

Michael Munzinger is an associate at CMS, China.

Features 2 - Stop Heartache Before It Starts

Three Easy Processes to Prevent Labor Law Risks in Foreign Companies
by JOHNSON CAO

Labor law in China is complex and younger Chinese employees are more outspoken towards their employers than their older counterparts. These factors together bring many challenges for employers. This is one of the main reasons the number of labor dispute cases have increased over the last decade.

Complex situations require sophisticated professionals. However, HR in China is still in its early stage and the main issue is that many HR professionals make mistakes in handling disagreements arising between employer and employees.

This problem can be easily handled by optimizing daily HR management processes. HR specialists should know the flaws in their management processes and improve them before they lose their cases in court.

There are three easy processes to prevent labor law risks between employers and their employees. The three ways should be deployed in different stages of labor relationship - from hiring to separation.

 

Quality Control Over HR Work by Authoritative Information

Often, HR departments propose wrong processes to handle crisis with their manager including wrong staff management, formulas or variations to calculate compensations.

This is understandable as that HR staff are usually not trained legal experts and labor law is complex. Another reason is that a lot of Chinese HR professionals do not have time to access proper legal resources. So, they ask people they know or people in online communities.

Research was conducted on how Chinese HR solve their daily issues. The research observed HR professionals behavior in HR focused online communities (QQ group, Wechat group, online forum, etc.). The study found that Chinese HR professional are nice and willing to help: when a HR representative asks a question on how to handle labor law crisis in the community, many will step in to counsel. However, the counseling activity usually results in answers such as “we do this this way” or “I think the problem can be solved this way”. Very few will point out the legal basis for their advice.

Surely, this is not a professional way to work on legal labor issues. International companies should not allow this method of information gathering to happen. Solutions to legal issues should not be based on advice given by a person with uncertain expertise.

Managers of international companies should be aware of this culture in the infant stage of Chinese HR and find a way to manage it. The way to manage it is to have a process to control the quality over the HR department’s proposal - to make sure that proposed solutions are in line with China’s labor laws.

The quality control process doesn’t have to be complicated. In fact, it can be very simple: the HR department should always tell the manager the source of the information (a judgment, a law, checklist prepared by an expert, etc.) when they hand in a proposal to solve the labor law issue. If you have legal counsel, ask your HR to talk with them. If you do not have legal counsel, they can go to specialized databases to get the legal information they need.

 

Moderated Negotiation

Current Chinese law has put negotiation and mediation as a formal solution to solve labor disputes. Then it is put before the arbitration and litigation process. That means negotiation is a favored solution to labor disputes from the law’s point of view, because this will save cost to the company.

Employers should consider negotiation against arbitration and litigation as labor disputes resolution because this will save time and cost for employer and save brand reputation. However, in reality, few employers have seriously considered this solution. When asked why, the answer is usually that it’s “hard to reach an agreement” or “employees usually ask for more than the law does.”

This is a trust issue: an employee is often concerned that his employer is cheating them. This mindset is understandable, given that the employee and the employer are in disagreement. The solution to this trust crisis is to have a mutually trusted party to moderate the negotiation with the employee in question.

So, who could be considered a mutually trusted party? Certainly, not the HR department because HR is hired by the employer. Some may think of a lawyer. This is arguably better than in-house HR even if cost is not considered, but here often the problem is that the lawyer is paid by the employer as well.

Then, who can be trusted by both employee and employer? In other words, who can be a neutral party during the negotiation process?

One trusted entity is a mediation organization. Another one, thanks to today’s technology, are online virtual labor law counsel services. Laws and judgments published on these services can demonstrate how the law is determined in similar cases from a neutral perspective. Usually on these platforms, there are tools to calculate compensations on a case by case basis.

By doing the aforementioned, the employee and employer can reach an agreement before going to court. So, the employer will just pay what they should. Generous employers will pay slightly more than they should which will make the employee happy because they know they were treated more fairly than if they went to court.

Companies should not forget to include that negotiation is required in the resolution process before arbitration into the company’s written policy or labor contract. With this clause, your employee’s case will not be accepted by the court before you finish the negotiation process.

 

Written Agreements via Communication Channels

What is meant by communication channels? Does this mean email address, mailing address, etc.? One may murmur “We have these, so this is not an interesting topic.” But, this is a necessary topic. This is not about the corporate email address and mailing addresses. This is not about the emergency contact that an international company usually has that is driven by their headquarter protocols. This is about a private contact an employee formally registers with the company and clearly agreed to as a default contact.

Why this is important? In recent years, a phenomenon of young, unhappy staff simply disappearing without notice to the employer to complete the procedure of separating has been occurring. The HR department has many methods of handling cases such as this one. However, before these methods are deployed, the HR department has to reach the employee with the statement, “please clarify your situation, or your absence will be seen as your resignation.”

To prevent risks, the employee must be contacted by their default private communication channel. By default, it means that employee and employer have agreed in written format that a letter that arrives to this address is regarded as received. Otherwise a simple excuse by the former employee stating “the company did not notify me in a timely manner,” will put the company in an awkward situation before the court.

So, it’s important for an employer to keep a default communication channel to contact employees. Private email address is always the best channel because an email address makes it easier for you to prove that an email was sent at a specific time to a specific person.

Lastly, while this method should only be used with an extremely unhappy employee, the channel should be set up when the employee is hired. It is easy to do, but it’s also an important risk-preventing process that many employers forget to do. Companies constantly have challenges during their day to day activities.

By implementing these three processes in your HR department, labor law risks can relatively be diminished before they start.

 

Further Information

Johnson Cao is the Executive Director of Haufe China and the Product Manager of HR Guru (人事法务通). He has a Master Degree in Art from Leeds University, England, and he’s also a qualified Chinese lawyer. He can be reached at caozx@haufe.cn.

Features 3 - Understanding EPT

How to Prepare for China’s Upcoming Environmental Protection Tax
by ALEXANDER PRAUTZSCH and SARAH OEMMELEN

On 25th December 2016, the 25th session of the Standing Committee of the 12th National People’s Congress has formally approved the Environmental Protection Tax Law of the People’s Republic of China (“EPT law”). This law has been published as Presidential Order No. 61 and will come to effect on 1st January 2018.

For the last 30 years, the pollutant discharge fee (“PDF”) was the system to reduce emission of pollutants and protect environment. The PDF has the status of a local levy and the application of PDF highly depends on the respective location of a company while it may have less relevance for companies up to now.

Effective 1st January 2018, this PDF will be replaced by the Environmental Protection Tax (“EPT”) which will be administered by tax authorities based on national standards. Given this change, companies will likely be facing a new quarterly tax filing requirement based on monthly emission of pollutants under the strict supervision of the in-charge Chinese tax authorities.

 

Who Will be Affected by This New Tax?

The EPT law affects enterprises, public institutions and other business operators which discharge pollutants directly within the territory of China. Individuals and other non-business operators are not affected by the EPT law.

 

Which Pollutants are Covered?

The EPT law covers four different categories of pollution: air pollution, water pollution, solid waste and noise. Within these four categories, only pollutants mentioned in the annex of the EPT law are considered as taxable pollutants. Taxable pollutants discharged to the centralized sewage and domestic waste treatment facilities established by law or solid waste disposed to facilities that meet national and local standards for environmental protection are explicitly excluded.

While all pollution categories have in common that the emission is taxed at certain tax amounts per emission quantity, the differences are how the emission is measured and weighed as well as what tax amount is applied. Pollutants, tax base, pollution equivalent value and tax amounts are defined in annexes to the EPT law. Table 1 and 2 in this article give you a flavor of how some of these annexes look like.

Air and water pollutant emissions are measured in kg. Table 2 contains a selection of pollutants in the category of air and water pollution for illustration purpose. You may note that each pollutant is weighted with a pollution equivalent value which indicates the harmfulness of the pollutant whereas a lower value stands for a higher harmfulness of the pollutant. The mathematics is that the emission quantity of each pollutant emitted in an emission location shall be divided by the respective pollution equivalent value, resulting in the pollution equivalent for that pollutant. This pollution equivalent shall be put into a ranking for each individual emission location.

For air pollutants, the pollutants with the highest three results of this calculation for an emission location are the individual “Top 3” and taxable under the EPT law. For water pollutants, the “Top 5” for Class 1 water pollutants and the “Top 3” for pollutants in other water pollutant classes are taxable. Note that the provincial/ municipal government with approval by the Standing Committee could expand the number of Top pollutants subject to EPT, e.g. to also include Top 4 and Top 5 air pollutants into the scope of EPT.

Following this logic, not all water / air pollutants will be taxable under the new EPT law. In a first step, only the pollutants listed in the tables will be considered. In a second step, the Top pollutants of an emission location shall be identified which are then subject to EPT.

Solid waste is divided into the types of gangue (waste rock in coal mining), tailings (waste remaining after processing ore), hazardous waste and various other solid waste.Solid waste is measured in tons. Noise is measured in decibel and will lead to EPT if exceeding certain standard noise levels.

It is worth noting that carbon dioxide will not trigger EPT as it is not mentioned in the respective annexes. However, given this has been part of an earlier draft of the EPT law already, one may not exclude that this pollutant may also be re-added to the list at a later stage.

 

How the Emission of Pollution Could be Measured?

There are different methods in the EPT law to measure the quantity of taxable air pollutants, water pollutants, solid waste and noise. If the taxpayer installs automatic pollutant monitoring equipment which meets requirements of the State, the discharge quantity shall be determined based on that monitoring. If such equipment is not installed, the discharge quantity could be calculated according to monitoring data and specifications issued by monitoring agencies.

If monitoring conditions are unavailable, the calculation could be done based on pollution discharge coefficient and material balances specified by environmental protection authorities. If none of the above method is available, the discharge quantity shall be calculated using sampling methods specified by environmental protection authorities.

 

How Will the EPT be Calculated in Detail?

For water and air pollution ranked as Top pollutants at an emission location, EPT will be calculated based on the quantity of the pollutants discharged divided by the pollution equivalent value, multiplied by the applicable tax amount.

For this, a taxpayer has to follow the steps below:

1.Identify (measure) the quantity of all relevant pollutants discharged in an emission location.

2.Divide this quantity for each pollutant by the respective pollution equivalent value.

3.Rank the pollutants by the result of the above and identify the individual Top 3s / Top 5s for an emission location.

4.Multiply the Top pollutants’ equivalent with the respective water or air pollution tax amount.

The tax amount for water and air pollutants is defined as a range of RMB amount per pollution equivalent and will be fixed by the provincial/ municipal government with a view on local specifics with approval by the Standing Committee. For water pollution, the range will be from RMB 1.4 to 14 per pollution equivalent and for air pollution it will be between RMB 1.2 and 12.

Example:

Let’s assume that a company pollutes the water by emitting benzene while no other pollutants are emitted. The quantity of the pollution with benzene is 300kg in January, 250kg in February and 320kg in March. Benzene is displayed in the annex as water pollutant no. 43 and has an equivalent value of 0.02. It shall be assumed that the tax amount for water pollution in the emission location is fixed at RMB 8 per pollution equivalent. The calculation will then be:
January: 300kg / 0.02(kg) x RMB 8 = RMB 120,000
February: 250kg / 0.02(kg) x RMB 8 = RMB 100,000
March: 320kg / 0.02(kg) x RMB 8 = RMB 128,000
The quarterly payment of EPT for this company: RMB 348,000.

For solid waste, the tons emitted are multiplied with a fixed RMB amount between RMB 5 (coal gangue) and RMB 1,000 (hazardous waste).

For noise, the emission is measured in decibel and is only taxable to the extent the national standard is exceeded. Exceeding by 1 decibel leads to a tax of RMB 350, exceeding 16 decibels and more to a tax of RMB 11,200 per month.

Which Exemptions or Reductions are Included in the EPT Law?

For some special defined activities, there are exemptions. For example, pollutant emission of agricultural production, motor vehicles, ships, air planes or urban sewage treatments are not affected by the new EPT law.

Apart, there are tax incentives available for EPT taxpayers. Where the concentration level of air pollutants and water pollutants is 30% less than the stipulated pollution standard, a 25% reduction of EPT shall be granted. Where the concentration level of air pollutants and water pollutants is 50% less than the stipulated pollution standard, the reduction of EPT shall be even 50%.

 

What Does That Mean for Your Company?

The EPT law upgrades the existing PDF system to a tax law following national standards. This means that in particular manufacturing companies operating with potentially polluting material should expect a new regular tax filing requirement on quarterly basis subject to the stringent rules and supervision of tax filings in China. Where in the past (and still for 2017) PDF has been levied by local authorities in a relatively lenient way (or potentially even been omitted), going forward, companies will very likely have to consider things like filing deadlines, late payment surcharges, tax audits, penalties, etc.

The new EPT law leaves still many uncertainties. As usual in China, further clarification should be expected from upcoming implementation rules. However, per experience, such implementation rules would usually only be issued shortly before or even after the law has become effective. Therefore, companies should not wait for that but already review potential impacts of the new EPT at a relatively early stage to leave more time for the analysis.

Given the technical nature of the whole topic, it may well be that the new tax filing will involve colleagues from finance department as well as technical departments. Therefore, it will be key to find a common language between the departments to avoid inefficiencies and delays in the cooperation.

In a first step, both departments may work together to analyse and assess the potential impact of the EPT on the company. The results of this analysis should heavily deviate between different companies, but should presumably more heavily impact manufacturing plants handling chemical materials. From a technical perspective, it should be considered which method is applied to measure or identify the appropriate quantity of pollutants. Savings on the quantity or concentration side for taxable pollutants would result in an immediate reduction of the respective tax burden.

Knowing the impact, a company could consider what measures of improvement would be available and how the cost-benefit ratio would look like considering potential tax savings. In any case, going forward, a reliable compliance process will be required between the involved departments to ensure proper and timely tax filings.

Companies should be aware that the EPT law requires the environmental protection authorities to establish an information sharing platform to facilitate the information sharing between the different involved authorities and make it easier to identify any deviation or miss-reporting.

In view of all the above, companies should rather earlier than later start to prepare for a sound compliance in terms of involved colleagues, processes and tax filings. In the view of current developments around software based solutions for tax compliance, an automated solution for this might also be considered.

 

Further Information

Alexander Prautzsch is Tax Director with PwC, located in Shanghai and the Tax Leader of the German Business Group in China, who advises clients from Germany and China. Contact: alexander.prautzsch@cn.pwc.com.

Sarah Oemmelen is Tax Deputy Manager with PwC China, located in Shanghai and a German certified tax advisor. Contact: sarah.se.oemmelen@cn.pwc.com.

In the Spotlight - The World is Changing Fast - and China is its Frontrunner

Interview with Mr. Dirk von Wahl, President and CEO of TÜV SÜD Greater China
by JENS HILDEBRANDT and MELANIE LINDSTAEDT

Mr. Dirk von Wahl has been the President and CEO of TÜV SÜD Greater China since January 2009. He holds a Master’s degree in Economic Engineering from Technische Universität Darmstadt, Germany and started his career at ABB Group in 1991, where he served in managerial positions in both Germany and China. By 1998, he became the president of ABB LV Installation Materials Co. Ltd., Beijing. In 2002, Mr. von Wahl was appointed the president of Volvo CE (China) Co., Ltd., Shanghai. Under his management, the unit grew from a representative office to a formal company. During his tenure, Mr. von Wahl also managed the construction project of the Volvo CE plant in Shanghai and established a country-wide dealer network in China. TÜV SÜD Greater China has almost 3.000 employees and 40 offices over China, Taiwan and Hong Kong. With over 20 years of experience managing businesses in this region, Mr. von Wahl leads TÜV SÜD’s development and growth by identifying strategic opportunities and implementing TÜV SÜD global directions successfully.

Dear Mr. von Wahl, as the CEO of TÜV SÜD Greater China, you have just moved from Shanghai to Hong Kong. What led you to this decision?

This was a rather personal decision as that my second child finished high school in Shanghai last year and both my kids are now off to university in other parts of the world. Shanghai is a vibrant and exciting city. Nevertheless, after 14 years in Shanghai with the kids in the house, this marks a new chapter in life that allows my wife and myself to be the master of our free time during the weekends. We go on regular hiking trips again and just in general, are out in nature more than was possible in Shanghai. From a business perspective, nothing has changed for me as I am still traveling a lot within the Greater China region during the week so it doesn’t really matter whether I start my trips from Shanghai or from Hong Kong.

 

How is your business in China developing and where do you see major opportunities?

The business could always be better but we do not really need to complain. For the past two years, we had double-digit growth both in revenue and EBIT, and the start of this year also looks quite promising. China is improving its product quality and wants to evolve from being the extended work bench of the world to an advanced industrialized nation. Some low-end products and industries requiring mass labor are moving to lower cost countries and the latest technology applications are implemented in China very rapidly today. Take WeChat payment for example, almost anywhere in China, you can easily pay for anything through WeChat and “Zhi Fu Bao” – from products, food or even your share of dinner with friends in a restaurant.

I would say digitalization is one – if not – the most important opportunity in China. The scope of digitalization and its implementation is quite wide; we are talking about smart factories, smart manufacturing to Industry 4.0. In addition, it is not only important to get all relevant machines/ equipment linked and communicating with each other, but also to ensure the safety and security of the data of such transactions. Here I would need to mention two standards - ISO 27001, the IT management system as well as IEC 62443 which provides a basis for IT security certification in industrial automation and control systems. To support the developments in this area globally, TÜV SÜD has set up two Digital Service Centers of Excellence to focus on the development of digitalization services. The second opportunity I see is green energy: the level of air pollution in China is not news anymore, the government is determined to improve it in the near future through the enforced use of new energy. Subsequently solar, wind power, smart grid and electric vehicles will continue to be growing applications.

 

What about the challenges?

As long as there is a challenge, there is an opportunity. And without opportunities, life would be less interesting and fun. Despite the recent developments in various countries such as the USA with a new president; UK deciding to leave the EU; Brazil and Venezuela with stalled governments; uncertainties in the relations between Turkey and the EU and the subsequent changes in the nations’ relations, I believe that for the TIC industry (Testing, Inspection and Certification), chances and opportunities will come from what is seen now by many as not only a challenge but a threat to global economy. As mentioned above from a technology point of view, I believe cyber security is one of the biggest challenges especially when new technologies, e.g. Internet of Things (IoT), autonomous driving or highly automated driving (HAD), industrial and private use of drones as well as e-commerce, are to be widely implemented. It must be ensured that no danger is associated with such use for mankind or the environment.

The world is changing fast. Our challenge as an organization is: are we changing fast enough to meet the requirements that come with those changes? Recently I found a saying from Albert Einstein, “If you always do what you always did, you will always get what you always got.” TÜV SÜD is in a “people business” and our challenge is to get our people to be open about the constant changes and drive continuous improvement – both professionally and personally. We have to bring the right people together in our organization and form teams the members enjoy participating in and can genuinely contribute to. My greatest satisfaction is bringing together individual performers or smaller groups of people, who sometimes don’t see eye to eye with each other, to form one big working team. To be able to see how these teams develop and continuously perform better over a period of time is the biggest joy and achievement at work for me.

 

Where do you see the development of the Pearl River Delta & Hong Kong compared to the other regions in China you are engaged in?

I have lived in Beijing and Shanghai for a long time. I know China is developing these urban areas through its national five-year plan. In the latest five-year plan, “go west” is the strategic direction and up to now, China has built 22,000km high-speed rail (HSR) to connect 29 of the country's 33 provincial-level entities which makes it the longest HSR system in the world. In other words, other regions are developing with a rapid speed. Midwest cities such as Chengdu, Chongqing and Chengzhou are some good examples. The competition among regions is stronger than before, especially as the wage gap narrows and some labor forces are choosing to move back to their home provinces after Chinese New Year. This change has already had some negative impact on Dongguan where many factories have either closed or moved to other locations with lower production costs. The Pearl River Delta & Hong Kong region is facing a critical challenge.

However, there is also a lot of positive development i.e. the Hong Kong-Zhuhai- Macao Bridge that is under construction now. This 55km long bridge is estimated to be completed by the end of this year. By then, people will be able to travel between Hong Kong-Zhuhai-Macao within one hour. I think the future development of the Pearl River Delta & Hong Kong will be similar to that of Silicon Valley in the USA. Hong Kong with its international finance center, and Shenzhen and Guangzhou with their innovation industries, will work closer together to create higher value products rather than the labor-intensive industries in the early 80s.

What does the upgrade of the Chinese industry mean for your company?

As I mentioned earlier, China is no longer just the “cheap goods manufacturer of the world” but is offering products of higher quality as well as developing a local market where consumers demand products that are state-of-the-art.

As a 150-year-old TIC company, TÜV SÜD has always been involved in technological advances and has been actively promoting the development of “Industry 4.0” and is cooperating with Chinese enterprises in the process of “Made in China 2025” amongst other topics such as cyber security defense.

As with all new fields of technology, the identification of the right people is not easy. And the fast changes in the industrial landscape in China have become a strain for the employment market with experts and specialists in several industries becoming very scarce.

 

If we go a step further: many countries like Germany with Industry 4.0 and China with Made in China 2025 are working on fully integrated, digital and automated factories. What will this trend mean for your industry in general?

This is a very interesting topic and our Greater China management meeting last week in Xiamen also discussed big data and digitalization to a great extent. Working alongside our clients in Germany and China, we are actively shaping this trend. The future trend of digitalization and automated factories or “smart factories” means that an incredible amount of data will be generated and the production processes and procedures will be re-defined. We think the enhanced crawler technology to analyse big data will allow and support the restructuring of China’s industry, especially the high-end industry.

Cyber security issues will also become more and more important. In smart factories, many productions are done by robots which are controlled by data and could become a target of malicious attacks. The IEC62443 standard on cyber security will be applied across the board on almost all industries. Also, the wave of digitalization requires the whole organization to change its mindset accordingly.

 

Will testing and certification fall victim to artificial intelligence in the future?

As mentioned above, the world is changing fast and the use of data becomes prevalent. I do not see our industry falling victim to but rather we will use AI to support our work to i.e. enhance the lab efficiency or, double check the assurance of a test report. Furthermore, AI could be seen as a next step in supporting the processes in our line of business - predictability of the quality of materials used for a certain product or the long-term mechanical effect on certain product usage. In the industry, AI will most likely have a profound effect on the service schedules of machines where through predictive maintenance, one would only need to work on such equipment if and when it is really needed.

 

How does your company cater to the trend of e-mobility in the Chinese market?

We provide a wide range of services to e-mobility in the Chinese market e.g. battery testing, power charging infrastructure testing and certification, functional safety etc. The Chinese government is giving priority to the new energy vehicle (NEV) development and driving the whole industry to a higher ratio of electrical vehicles in the OEM’s fleets. With the sheer size of China and the relatively inconvenient logistics of battery transport, we will soon have several test centers for the largest batteries including the ability to perform abuse testing. But it certainly doesn’t stop at the electrification of cars. Assisted driving is relatively common in today’s car models and the next steps of highly automated driving (HAD) and fully autonomous driving are already in sight. We are actively supporting manufacturers in these areas as well.

 

Customers are aiming at increased efficiency, time-to-market and quality on products and services, how does your company deal with this demand in terms of organizational structure?

Given the large size of China and the wide distribution of industrial activities in China, we found that a matrix organization is the best model for us. We need to be represented close to the industrial centers of our customers and at the same time make sure that we perform every inspection, test or audit exactly in the same way to ensure comparability and transparency of the results and findings. So, we have business lines who are responsible to steer the business from a strategic and tactical point of view and regional setups who are responsible for the day-to-day operations.

In addition to that, we have also introduced service lines – mostly laboratories but it also applies to some extent to product inspections. The service lines connect and serve various business lines, driving efficiency by allocating resources in an optimal manner which would otherwise not be possible due to internal structures of our business lines. Since we have introduced this concept several years ago, we have seen clear scaling effects on cost and substantial efficiency improvements. We currently have large testing centers in Shanghai, Guangzhou, Shenzhen, Wuxi, Hong Kong, Taipei and other regions. Testing scopes cover textiles, machinery, consumer and household goods, electric power tools etc. which allow us to provide one-stop services to our customers in Greater China.

Mr. von Wahl, thank you very much for your time!

More than Business - Technology Troubles

Overcoming the Challenge of E-Waste in China
by GREEN INITIATIVES

Managing Waste Electrical and Electronic Equipment (WEEE), also known as e-waste, is a growing challenge in China. An increase in China’s domestic consumption of electrical and electronic goods, large imports of e-waste from the West, and the informal treatment of e-waste has created significant obstacles for the Chinese to overcome in order to effectively reduce and treat e-waste.

China’s dramatic domestic development in the last century has created both positive and negative results. Positive results include improved standards of living, better welfare, and increased international exposure. Some of the negative results of this rapid growth include air pollution as well as the massive generation of waste, which has had a huge impact on the environment. More recently, rising incomes of China’s burgeoning middle class has made technology more accessible, which has also contributed to increased e-waste generation. The quantity of e-waste disposed domestically is growing exponentially. According to China Household Electric Appliance Research Institute (CHEARI), In 2011, ten million units were disposed; in 2014, the number of units disposed increased by tenfold to over 110 million.

In addition to the increasing amount of e-waste generated domestically in China, huge quantities of e-waste are imported from abroad for treatment and disposal. According to the China Business News report, China is the final destination for 70% of the world’s 500 million tons of e-waste annually. Currently, e-waste is primarily generated by western countries; however, as India and Southeast Asia continue to develop, these countries also pose a threat to exacerbate the problem.

It is estimated that 60% of China’s e-waste is treated in informal waste centers with low safety standards and low-cost labor. Informal waste centers are often small-scaled, family-run, backyard recycling workshops which makes it difficult for the government to manage the treatment of e-waste. Currently, e-waste treatment occurs primarily in cities along the Southeast coast of China, most notably in Guiyu in Guangdong province. Guiyu is widely known as the largest e-waste recycling destination in the world. At its peak, approximately 5,000 workshops in Guiyu recycle 15,000 tons of e-waste daily.

There is a solution to the e-waste problem in China, however, it will require a collaborative effort by the Chinese government, individuals and industries.

 

Negative Environmental and Health Impacts of E-Waste

The informal treatment and disposal of e-waste has both direct and indirect impacts on the public and environmental health. The treatment process primarily consists of burning, shredding, and using acid baths to extract precious metals from the collected items, these processes directly and indirectly harm both humans and the surrounding environment in China.

Throughout the informal e-waste treatment process, workers frequently come into direct contact with Polychlorinated Biphenyls (PCBs), which are proven to have mutagenic effects on human hormones in both adults and children. Acid baths, burning, and shredding releases harmful emissions into the environment. It is reported that 80% of children in Guiyu suffer from lead poisoning, which is damaging to human cardiovascular, reproductive and nervous systems.

Negative environmental externalities caused by the treatment and disposal of e-waste are well-documented. Toxic chemicals such as cadmium, lead, and mercury are harmful to ecosystems in the surrounding areas. High levels of mercury contamination have been linked to the death of vegetation, marine life, and birds. In Guangzhou city, roughly 400 kilometers away from Guiyu, city officials found high rates of cadmium in the soil and groundwater, rendering it toxic.

The negative environmental and health impacts of e-waste demonstrate the pressing need for China to reduce and manage e-waste.

 

Policies Implemented by the Chinese Government to Manage E-Waste

China (People’s Republic of China or PRC) has implemented several programs to reduce and manage e-waste, including establishing production standards for electronic products, implementing consumer engagement programs, and providing financial support for treatment facilities.

The Ordinance on Management of Prevention and Control of Pollution from Electronic and Information Product, commonly known as China RoHS, has been enforced since 2007. In 2014, the PRC re-published the WEEE Treatment List to include 14 products categories such as mobile phones, air conditioners, and televisions. The WEE Treatment list places regulations on the use of hazardous materials, product labelling and reporting, as well as suggestions for recycling and disposal. In January 2017, China’s State Council issued a new Extended Producer Responsibility (EPR) plan to ensure the environmental sustainability of a product throughout its lifecycle.

Consumer engagement programs are also crucial to reduce e-waste generation. From 2009 to 2011, the PRC offered rebates to customers who traded in older appliances when purchasing a newer model. More recently, a mobile application called Baidu Recycle Station was launched in partnership with the internet giant Baidu to help consumers identify safe ways to dispose their e-waste while offering them a small financial incentive for it. The app’s goal is to bring consumers, manufacturers, and treatment facilities together to streamline the recycling and disposal of e-waste in China.

In 2012, the Chinese government implemented the WEEE Treatment Fund Policy, which created a framework for providing financial support to e-waste treatment facilities. The WEEE Treatment Fund Policy is supported by three PRC ministries, including the Chinese Ministry of Finance. Funding is generated through levies placed on manufacturers and recipients of imported electronics. These funds are then distributed as subsidies to WEEE recycling and disposal facilities. The PRC revises WEEE standards regularly, with the most recent revision in 2016 addressing changes to five product categories and standardizing subsidy rates for e-waste recycling.

The PRC’s efforts to reduce and manage e-waste are impressive, however, more will have to be done in the future to overcome the growing e-waste problem.

 

Individual Actions to Reducing E-waste

There are various actions that individuals can take to limit e-waste and the associated pollution.

First and foremost, it is essential to embrace conscious consumerism by reducing purchases, choosing better quality and longer lasting products, as well as buying environmentally friendly electronics or from brands that are more responsible. Users can take good care of electronics to prolong a product’s life-cycle and prevent unnecessary waste. Finally, end-users can responsibly recycle electronics through local recycling programs, ensuring materials can be salvaged for re-use or disposed of properly.

It is important to note that with an increased number of e-waste recycling solutions, consumers also have an added responsibility to ensure that the organizations who are providing them with recycling solutions are both licensed and safe. This will help ensure that fewer e-waste ends up in the informal recycling sector.

 

Industry Actions Towards Reducing and Managing E-Waste

Industry changes to the production of new electronic goods and e-waste treatment standards will help reduce and manage the adverse impacts of e-waste.

Establishing industry-wide standards on sustainable design, ecofriendly materials, and eco-friendly manufacturing is the first step towards sustainable growth. Producing better quality products that embody a ‘zero-waste’ design approach will play a big role in reducing the generation of e-waste. Making ‘modular’, ‘evolutionary’ products will also encourage consumers to use products longer and potentially alter consumers’ purchasing behavior.

Providing efficient and affordable ‘repair’ solutions will have a huge impact by reducing the amount of e-waste that is generated, and extending product lifecycles when they would otherwise be considered as waste. Placing an increased amount of responsibility on producers for e-waste treatment via Extended Producer Responsibility (EPR) is important to ‘close the loop’ of e-waste. Finally, improving internal e-waste treatment monitoring, processes, and standards will also reduce the associated negative impacts on humans and the environment.

 

What’s Next and How Consumers Can Help

E-waste has had multiple negative impacts on China’s environment, but measures taken by producers, consumers, and the government to improve current conditions and promote sustainable growth provides hope for a brighter future. As e-waste generation increases domestically and globally, it is becoming increasingly important for China to enforce and improve standards to avoid further environmental and health degradation.

Adopting a cradle-to-cradle design approach to create high-quality, eco-friendly, and safe products is the first step towards reducing e-waste. It is equally important for consumers to reduce consumption, re-use products as much as possible, and efficiently recycle towards the end of use. Finally, enforcing and improving e-waste treatment standards will reduce the adverse impacts of e-waste treatment and disposal on humans and the environment.

China is not the only country that faces the challenge of reducing and managing the generation of e-waste. E-waste is a global challenge that will require a collective effort that incorporates government, industry, and individual action to ensure the healthy future of our planet and its inhabitants.

 

Further Information

This article was a collaborative effort between various members of the Green Initiatives team. For any enquiries or feedback on the content of this article, please write to: info(at)greeninitiatives.cn.

Green initiatives (GI) is a volunteer-led nonprofit organization based in Shanghai since 2009. GI’s mission is to increase education on environmental issues while providing local solutions to environment and waste problems in cities. GI organizes regular community activities to spread awareness on a wide range of environmental issues, and implement impact focused scalable programs to engage businesses through CSR:

GI launched the [WE] Project in 2016 to provide the local community and companies in Shanghai with a transparent, systematic and environmentally-friendly way to dispose/recycle unwanted and broken electronic items. The project is currently being planned for launch in other cities. For any enquiries on [WE], please contact we(at)greeninitiatives.cn.

02 | 2017 | THE ELECTRIC AGE

Foreword and full PDF

The automotive industry proceeds rapidly with the development of cars with alternative propulsion systems, like plugin hybrid and battery-electric vehicles. By surpassing the United States as first global leader on the New Energy Vehicle (NEV) market in 2015, China plays a major role in driving the further development of the electric vehicle industry. According to data from the China Association of Automobile Manufacturers (CAAM), with a production of more than 517,000 NEVs in 2016, China has established itself as a power to be reckoned with.

In this issue of the German Chamber Ticker, we will also take a closer look at smart manufacturing, the Internet of Things, smart technologies and their effects on the automotive industry, but also on our daily life and our connected or even “smart homes.” 

Furthermore, experts will share their insights on growing trends in the Chinese transportation industry, in particular the fast development of the enormous high-speed railway network in China.

Yours sincerely,

Alexandra Voss

Download the PDF here

Cover Story 1 - China's New Energy Vehicle

Understanding the Market, Policy & Consumers
by YALE ZHANG

2014 and 2015 were stunning years for the New Energy Vehicle (NEV) development in China. In 2014, China produced nearly 85,000 plug-in hybrids and EVs, which is 265% higher than in 2013. In 2015, the production volume hit 379,000 units, rocketing by 345%. In 2016, the volume grew further 35% up to 510,000 units.

China’s global rank of the NEV market increased from number four in 2013 to number two in 2014, right after the US. One year later, China jumped to number one, far higher than the US market size of 123,000 units. In 2016, China’s NEV volume has outpaced more than double of the rest of the whole world.

Notably, this type of growth, especially the leap forward in 2015 was not the result of natural market demand, instead, policy and subsidy played major roles in this hike. In January 2017, the NEV sales decreased by 50% year-on-year, an alarming signal that NEV market may become shaky when subsidies begin fading.

 

The Policy Carrots

In China, NEVs are defined as plug-in hybrids and EVs (including battery EVs and fuel cell EVs), whereas full-hybrid cars, like the Toyota Prius, are not regarded as NEVs and therefore are not eligible for subsidy around the world.

The State Council released an Energy Conservation and New Energy Vehicles Plan on 18th April 2012, which stated the target for the number of electric and plug-in hybrid vehicles in operation should have reached 500,000 units by 2015, and by 2020 it should rise to five million units.

China's new energy vehicle development formally began in 2009, when China started the pilot project Ten Cities, Thousand Vehicles. That year, the central government first selected ten cities as pilot cities while in late 2010, the list was expanded to over 25 cities. By the end of 2012, the NEV volume was targeted at 30,000 units.

This three-year pilot project, which is called Stage-1 NEV Demonstration can hardly be defined as successful, since most of the cities were not interested in spending their local funds to subsidize NEVs made elsewhere. In a very difficult manner, the targeted 30,000 units was eventually met, mostly due to the push by the central government in the second half of 2012.

With this far-from-perfect experience, the central government did not immediately launch Stage-2 demo project until September 2013. From that time on, 88 cities were selected to purchase nearly 330,000 units by the end of 2015.

More than 50% of those 88 cities have issued local policies to subsidize individual consumers, mostly by matching the central government subsidy amount. Thus, EV subsidies reached nearly RMB 110,000, and PHEV reached about RMB 65,000.

On top of the direct subsidy, central government decided to waive the 10% vehicle purchase tax of NEV from September 2014 onwards. This makes total subsidy value almost 40-45% of most NEVs retail prices.

Additionally, large cities with license plate control policies, such as Beijing, Shanghai, Shenzhen and Hangzhou all give free license plates to NEVs, a value of about RMB 50,000-90,000 respectively based on which city you live in. With this additional benefit, the total subsidy ratio would hit 60-65% of the NEV retail prices.

Although charging facilities are still far from being sufficient, the large subsidy amount, and more importantly, a free license plate, motivates individual consumers to purchase NEVs. Since 2014, the individual demand of PHEVs boomed, now accounting for nearly 75% of total PHEV sales, although individual demand of EV is much more moderate, accounting for less than 30% of EV sales.

Even with such high subsidies from the central government, similar to Stage-1, local cities are not keen in purchasing non-local NEVs using local city budget. Again, similar to Stage-1, the second half of 2015, local cities were reluctantly busy with reaching their assigned targets. The sales of Q4-2015 alone accounted for more than 50% of the targeted 379,000 units for that year.

 

The Problem with Policy Carrots

Although the US and Japan also subsidize NEVs, they control the ratio of subsidy against retail prices between 10% and 25%, while China’s subsidy ratio of 40-65% is much higher, resulting in unreasonable NEVs retail pricing by some OEMs. In general, China’s NEV retail prices are 30-50% higher than the NEV prices in the US or Japan market.

Due to the high subsidies in China, there was rampant subsidy fraud in coastal regions. The MIIT and Ministry of Finance jointly started investigations in early 2016, and already punished more than ten companies related to cheating. This explained why there were many rental companies emerging from nowhere in 2014 and 2015, purchasing large amount of EVs in 2015. These “rental companies” were often established by car makers, who first sold EVs to its own rental companies or a related third party, and after getting the subsidy, disassembled the EVs and took back the battery for the next round of “EV manufacturing.”

With too many fraud cases, the government realized that they cannot make an industry grow into a mature business only through subsidizing, therefore the Chinese government is determined to phase out the subsidy by the end of 2020. With the 2016 subsidy amount as a base, the 2017 to 2018 subsidy will only be 80% of that in 2016, and the subsidy between 2019 and 2020 will only be 60% of that in 2016. In addition, the central government decided there will be no third stage pilot project. Since current NEV sales are mostly achieved by policy stimulus, OEMs will have much bigger pressure to reduce their costs after the government’s subsidy reduction. OEMs need to be on their own by end of 2020. Those who priced their EV too high will lose market share, while those who can reduce costs in the coming five years will quickly gain market share.

Unfortunately, most OEMs are not responding quick enough to lower their costs and prices, instead, it seems that they would rather peel as much as they can from the current NEV pricing strategy. For instance, BYD’s Qin was RMB 189,800 in 2014, but in 2016, BYD did not lower the Qin’s price, instead, it increased the price to RMB 209,800.

But why are OEMs not as enthusiastic as they act? The answer is simple: because the government gave out too many carrots, but no sticks. In other words, they gave them the incentive (carrot) but didn’t enforce the restrictions by moving the incentives further forward (stick).

 

The Policy Stick

The main stick so far is fuel efficiency limits of passenger cars, or Chinese version Café. By the end of 2020, average fuel consumption of traditional car of an OEM will be 5L/100 km, while that of energy saving vehicles should be 4.5L/100 km.

To hit this target, the industry needs to produce around 7% NEVs of total passenger cars produced in 2020, or around two million units of total 26 million car sales. With the current pricing structure and lower subsidies, it is less likely that consumers are willing to buy that many NEVs in 2020. On 1st May 2013, China’s government issued the Passenger Vehicle OEM Average Fuel Consumption Accounting Method. It defined the punishment of OEMs in case they fail to meet the standards. Thus, OEMs will be fined up to RMB 12,000 for each vehicle they produce that does not meet the requirements. So, if a car maker produces one million vehicles, the fine will be around RMB ten billion. Obviously, this penalty seems to be too strict and unrealistic.

Since then, four updates and modifications have been imposed, including the introduction of a credits trading system into the auto industry and a gradual reduction of the punishment. Even now no one really knows how this policy should be enforced.

The whole industry believes that the government cannot punish every firm, since too many cannot meet the given standards.

For the time being, it seems like the stick is not big enough!

 

The Consumers

To better understand NEV consumers, KPMG China and AutoForesight have conducted a joint research concerning the needs of current and future Chinese NEV owners and potential NEV buyers in Q4-2016. Motivation and Rationality

70% of Chinese NEV owners and potential buyers have an average need for mobility of up to 40km/day. The share for weekends are a bit lower at 65%. Primary use of electric vehicles is for commuting to workplaces. The research found that for both groups, their perception on electric vehicles is that they – compared to Internal Combustion Engine (ICE) cars – are more economic and environmental friendly, followed by the fact that state subsidies are an important factor to buy/own an EV, especially in dense cities with license plate quotas.

The motivations for purchasing an electric vehicle are manifold. While owners claim that they benefit the most from free car license plates paired with state subsidies, the potential buyers believe that the lower maintenance costs, the environmental protection, followed by the free license plate aspect are the key drivers to purchase an EV.

However, classical concerns on NEV remain. Particularly the battery range and technology, the slow speed of battery charging, as well as the availability of charging pole infrastructure are seen as the main drawbacks of owning an electric vehicle. Currently, the majority of NEV owners are primarily charging their cars at home or at their work places (if charging infrastructure is provided). However, 45% of the current NEV owners are still willing to buy another NEV, demonstrating customers’ belief in the future of NEV.

Both, Chinese NEV owners and potential owners have similar expectation concerning the drive range. Over 70% expect the range of an EV to be at 350 km, since that would sufficiently cover their mobility needs. Regarding the battery charging time, more than 53% of NEV owners would accept a charging time of up to four hours (potential owners 73%), while the majority of NEV owners (84%) expect a maximum fast charging time within one hour (potential owners 61%).

 

Brand Awareness and Preference

As the Chinese government is encouraging customers to buy locally produced NEV brands through tax incentives, subsidies, and free license plates, it is not a surprise that most sales come from domestically produced NEVs. According to a customer survey, Chinese brand awareness and preference are especially strong for BYD, Roewe and BAIC. Interestingly, the major foreign brand that features brand recognition (but only for potential customer) is Tesla, which is ranked right behind BYD and Roewe. Following the brand awareness, product quality and professional service are the other two reasons EV owners purchased their vehicles. Also for potential customers, the brand awareness is a key factor, followed by industry leadership in the NEV field and the maturity of their EVs technology.

 

Beyond EV

The Chinese society, especially their younger consumers, embrace new technologies that ease everyday life, e.g. mobile banking, social media, and e-commerce. Since convenience is a key factor, NEV owners and especially potential owners are evolving new expectations towards what an NEV should include in the future. Foremost, semi and/or fully autonomous features should be included in every NEV. From autopilot to parking assistant to other ADAS features, all are ranked high amongst both customer groups. 49% of NEV customers would expect NEVs to have autonomous driving Level 3 (eyes-off), 32% expect Level 2 (hands-off), while a robust 68% of potential customers expect both, Level 2 and 3 of autonomous driving included in their future NEV. Both groups agreed that Level 3 would highly improve the quality of mobility and thus improvements to life quality overall.

NEV owners and potential owners have quite a positive attitude towards the sharing economy when it comes to electric vehicles. Although 65% of all respondents would use a sharing service, most of them acknowledged that they would still want to own their own car.

 

The China Perspective

With the EV getting traction in the Chinese market and gaining more acceptance in the society as a real alternative to traditional ICE vehicles, Chinese consumers raise the bar of expectations on how EVs should fulfil their mobility needs. Of course, Chinese consumers realize that technology still needs a lot of improvements in order to provide safety and quality.

However, they have a very clear concept of how EVs should be for themselves, but also for society. In a nutshell, EVs should not only meet their mobility needs of commuting and reasonable charging speed, but should also be environmental friendly and revolutionize the way future mobility will shape the society and equip them with advanced technology (autonomous and sharing). Furthermore, it should bring new life style to its users.

 

Short-Term Solution, Not a Long-Term Strategy

Even though consumers are always practical and willing to pay a fair cost for new technology and environment protection purposes, yet they definitely will not purchase any costly NEV when there is no subsidy at all.

Besides, subsidies cannot become a car maker’s excuse to keep the NEV product price at high level for too long. Relying on government subsidies and fleet purchases is only a short-term solution, not a long-term strategy.

The key here is, after giving out too many carrots, the government may shift to holding out a stick and force the OEMs to follow the market rules. Though no one knows how big this stick will be, it will still pressure OEMs to reduce their costs quicker. If electric vehicle prices can be reduced to 30-50% higher in comparison to a same sized traditional car, there is no need to worry about achieving the 7% target set for NEV sales by 2020. Otherwise, it will be difficult to even maintain 2016 volume by 2020.

 

Further information

Yale Zhang is the Managing Director of Automotive Foresight (Shanghai) Co., Ltd. Based in Shanghai, AutoForesight is a leading market & industry research firm in the automotive environment to reduce the risk and cost of clients’ planning & decision process. It is a reliable intelligence source & solution partner for automotive society and industry investors. He can be reached via yz(at)autoforesight.com.

Cover Story 2 - Changing How We Live ?

Connected Homes and Integrated Technology
by ELLEN TATHAM

Less than a decade ago the idea of remotely controlling devices in your home felt like something from a science fiction novel, today it feels normal. In order for smart homes to function effectively you need a central “hub” from which everything can be controlled, and smartphones or tablets seem to be becoming the obvious choice. The global adoption of smartphone technology has been faster than that of any other consumer technology in history. The developments in Smartphone technology have empowered the consumer and provided them with greater capabilities, ushering them into the realm of science fiction.

 

Simple. Smart. Connected.

Today’s user wants a simple interface, smart technology, and the ability to connect their devices. In theory, any device or appliance that uses electricity can be added to a home network and can be controlled remotely. The earliest forms of smart homes used electrical wires to communicate and were controlled via a fixed central hub, which was like a big keypad. Modern smart homes connect to radio waves and can be controlled locally or remotely via a smartphone or tablet, providing far greater flexibility.

If you’re unsure if you turned off the air conditioner in your house you can simply check your app to make sure. If you’re at work and you notice that the air is particularly polluted you can remotely access your air purifier and check the pollution level at home, turning on the device so that you will return to a clean home. Motion sensors can tell the difference between a pet and an intruder at your home and notify you immediately if something is not right. With technological developments, the possibilities are continually increasing. This technology is no longer reserved simply for the elite; it has entered the mainstream market at affordable prices.

Of course, the cost of a smart home varies depending on how smart the home is. If it is a case of the user simply slowly updating their appliances and devices with smart ones that can be done over time and at a lower cost, if they choose to build in sophisticated systems, the costs will rise significantly.

 

Connected but not Smart

While the term Internet of Things (IOT) has been around since the 1980s the last three to four years has seen a huge increase in use and understanding. Nowadays IOT has morphed to mean integrated and connected devices such as smart homes and smart cars. Most experts agree that within the next five years, homes will be a lot smarter but we’re not quite ready to make a truly smart home yet.

Many argue that what we have now is merely a connected home not a smart home. How do we differentiate between them? For a home to be really smart the devices need to not only be connected but also be able to seamlessly communicate with each other. So, if you were coming home earlier than usual your car or other connected device could communicate with your house to make sure that heating levels and other settings were the way you liked them. However, a connected home requires more input on your side.

Ideally, living in a truly smart home would be the equivalent of living in a service apartment – the washing, temperature regulation, security and even grocery shopping would all be done for you. It is the belief of many tech companies that in a smart home the technology should be able to just fade into the background so that you are no longer aware of it.

Interviews with Bill Gates in the 90s revealed that people who entered his home were provided with a chip, which was customized to their preferences for lighting, music, and art. As they moved through the house everything would change accordingly. While this seemed so radical at that time, we are now making more inroads towards the average person being able to recreate this.

 

Lack of Connectivity

Another major issue with smart or connected homes is lack of connectivity of devices. The manufactures of the smart hubs need to increase partnerships with electronics and tech companies that produce the end-user devices and thereby improving the opportunities for connectivity.

Chinese manufacturers such as Xiaomi are focusing on creating one-stop-shops: Manufacturing devices and appliances that are all connectable via its app. The Xiaomi model means that there isn’t the need to find brands to team up with since it is already producing the products and just needs to integrate them with the existing app. As they add more products the app will update to add the additional features and settings. It manages to do so at very competitive prices but perhaps losing some of the sophistication or quality that people are looking for.

 

Use Words Not Action

Many companies are testing the waters of smart home voice recognition devices but two of the most talked about are: Amazon Echo and Google Home. So far, the reviews seem to be strongly swinging in favor of Amazon. It is continuously adding new third party apps to its Echo app store and the device’s functionality keeps evolving and improving, far surpassing that of Google Home.

The companies make no secret about the fact that the device is “always on” and the microphone is continually recording, but the recording function only kicks in when the “wake word” has been used. Occasionally something that sounds similar could cause the record function to begin by mistake.

In December 2016 Amazon refused police access to the data from the device in a murder suspect’s home. Mistaken recordings as well as the timing of recordings could both be of use to police investigations. In this particular case after the police issued a warrant they went on to extract some information from the device.

In recent years, such “smart tech” has been used in court cases to prove or dispute claims; this has been particularly true of wearables. Of course, the development of smart tech and wearables will lead to the necessity for new guidelines and laws to deal with the moral, ethical and security implications but the security concerns alone could fill a whole issue of GC Ticker, so it seems best not to go into too much detail here and focus on the uses for wearables.

 

Are Wearables the Future of Smart?

When people hear wearables they likely think of watch or bracelet type devices because that is what they have most experience with so far. Wearables produced so far haven’t been particularly popular and studies show that 50% of consumers lose interest and stop use within six months.

Jen Quinlan, V.P. of marketing for gesture recognition company Rithmio compares the current generation of wearables to a “boombox on your wrist.” The potential for wearables in the future is great and many advertisers are looking forward to the possibility for greater targeted ads, but this also brings us back the topic of security/privacy.

Predictions indicate we could be using customized and individualized smart clothing, shoes, earrings, contact lenses, glasses, buttons or even nail polish. Much like the chips in Gates’ home, wearables provide potential for seamless integration and communication between smart devices.

 

Smart Energy Saving Solutions

As the number of devices in our houses increases, naturally so would our energy consumption, but with the surge in smart energy saving solutions the amount doesn’t need to be so great. Today the highest performing LED light bulbs consume 85% less energy than incandescent light bulbs. The other developments already existing or in the pipeline could have a profound effect on our energy consumption in our homes including anything from: Magnetic refrigerators that cool by changing the magnetic field and thereby reduce carbon emissions and energy bills, to fluorescent reflective roofing pigments that can help with cooling by reflecting more than four times more sunlight than other pigments.

 

Game Changing Technology

The above mentioned “smart” or “connected” solutions also have another great advantage and that is the impact they have on the lives of people living with disabilities. The World Health Organization estimates that one billion people worldwide have a disability; in Europe and the US that is equal to one in five people. Smartphone or tablet controls for lighting, fans, window blinds, heating, or other home devices can provide greater freedom to people with mobility issues, and for people with muscle atrophy tapping a button on a smart device is much easier than fumbling with small switches. Voice controlled devices such as Amazon Echo or Google Home also provide many possibilities especially as the list of third party apps increase.

 

Embrace the Advances

As everybody becomes busy, connected and smart homes could help people use their time and energy more efficiently and free them up to focus on other things, as well as profoundly improving the lives of people living with disabilities.

With any major technological change, we need to make developments and technology needs to advance and this can be a lengthy process. We may not be at the stage that we can call them smart homes, but even looking at what has become possible in the last ten years thanks to mobile technology is incredible. While it’s true that the technology the Gates’ house was using decades ago is not yet available to the general population, it also the case that any technological advancement requires an innovator to lead the way before it becomes popularized and mainstream and we’re getting much closer.

It’s easy to be critical of smart tech and what we have now is far from perfect, but technology is what we make of it – so let’s embrace the advances and look forward to the development of truly smart homes and fully customizable wearables and all the other possibilities that we still can’t even imagine.

 

Further information

Ellen Tatham holds a BA in Chinese (modern and classical) from SOAS (the School of Oriental and African Studies). Until April 2017, Ms. Tatham was a member of the German Chamber Ticker team as well as project manager for the German Chamber Benefit Program. After seven years in China she moved back to the UK. If you would like to say Hello to Jason Isaacs, you can reach her via ellentatham(at)gmail.com.

Cover Story 3 - Re-shaping the Pattern of Mobility

A Brief Analysis of the Growing Trends in the Chinese Automotive Industry
by FREEMAN SHEN

There is essentially no difference between what we drive now and a car invented by Carl Benz a hundred years ago. So, I have been thinking that if Android and IOS can be considered the second invention of the mobile phone, then when will we truly reinvent the car?

This is the opportunity seen by the Chinese automotive industry today. We believe that the next three to five years will be crucial: The car will be redefined and the technology singularity for the automotive value chain is approaching. The accelerated speed for future automotive developments will significantly pick up and display an increasing level of intelligence.

 

New Energy and Intelligence

Intelligent cars represent the evolving trend of auto intelligence, they can offer free mobility and comprehensive solutions, which are safer, more energy-conserving, environmentally friendly and convenient, and therefore internationally are considered to be the strategic height for development of the automotive industry in the future. At present, all major developed countries attach great importance to intelligent cars and continue to increase their input. Data shows China has outnumbered the US to become the world’s largest country for the manufacturing and sales of cars and electric vehicles. In 2015, the State Council of China released Made in China 2025, in which intelligent connected cars were prioritized as a national strategy for the first time. Intelligent cars are likely to become a strategic opportunity for the rise of China’s automotive or even the entire manufacturing industry.

 

Energy Conservation and Environmentally Friendly Solutions

Nowadays, auto related social problems, such as energy shortages and deteriorating environmental conditions impact the future development of industries. In 2015, China’s import of crude oil totaled 328 million tons, with external dependence up to 60.6%: Far higher than the international red line, with half of the imported petroleum being consumed by cars. Environmental protection is part of people’s livelihood, it is both a political and economic issue that must be seriously addressed. Although there remain disputes about the specific impact of the auto industry on environmental pollution, cars are without doubt a major pollution source. This means China’s auto industry must follow a more energy conserving and environmentally friendly path.

Intelligent connected cars that integrate multiple future new technological applications, will provide the auto industry with all manner of new possibilities for effectively solving energy and environmental protection problems, including: Optimization of fuel consumption and emission control under intelligent vehicle running, energy conservation and emission reduction under intelligent travel modes, and remarkable increase of car sharing utilization under new business patterns, etc. All these potential applications will ensure that the auto industry meets the needs of the national economy and people’s wellbeing within the framework of energy and environmental protection.

 

Re-shaping the Pattern of Mobility

Recently the sharing economy has been frequently mentioned, with the emergence of bike sharing models such as OFO, Mobike and many other brands. Sometimes we cannot help asking ourselves, will we really need to buy a car in the future? Usually we buy a car to drive to work in the morning and back home in the evening, and the car is left unused most of the time in between, which is actually a waste of resources. Then wouldn’t it be possible for the car of the future to serve consumers in a sharing pattern as such Car2Share or other models? As mobility pressure becomes heavier in mega cities and there is an increase in people appealing for energy saving, improved environment, and enhanced efficiency on a daily basis, sharing transport will definitely be the choice made by more and more people.

Taking car sharing as an example, intelligent connectivity can support the popularization of car sharing, but only intelligent cars with autonomous driving capability can thoroughly “liberate people,” allowing 24/7 car sharing to become a true possibility and realizing the "idealism” of car usage, i.e. no ownership, usage on demand, usage on call and handy return. This kind of sharing economy characterized by “priority on usage instead of ownership” will remarkably enhance the utilization of cars, making it possible to combine the people’s needs for cars and an energyconserving auto society. Now, China’s sharing economy is developing at a growth rate of about 40%, far higher than the 4.7% growth of auto sales, so it’s safe to say the future of car sharing is bright.

 

Cars of the Near Future

The development of intelligent cars is a time-consuming and arduous mission. What we can focus on is the predictable future, i.e. what to expect from the car in three to five years. First of all, we can be sure that complete autonomous driving Level 4 in engineering sense cannot be fully achieved and on a large scale within the next few years. Yet, vehicles in three years will be equipped with a growing number of increasingly mature driver assist technologies. We can imagine such a scenario, with connections to cloud-based data, so that one day when you drive into your community, your car will automatically remind you that: “You have done insufficient exercise today, please walk home.” After you get out of your car it will automatically drive back to its parking spot and begin charging.

Next, along with reduction in the cost of batteries and development of a Battery Management System, purely electric vehicles with a driving range under 250km will be rapidly phased out, and a driving range of 500km will become more common. Fast charging technology will develop together with battery management and charging networks; eventually consumers will be offered convenient fast charging solutions. Charging in 15 minutes, Driving Range of 400km will no longer be fancy catchwords.

 

IoT will Generate Further Possibilities

According to previous estimations by Google and Tesla, by 2016, there will be over 6 billion connected objects in the world, including around 62 million vehicles, which will be the third major internet carrier after computer-based internet, mobile phone-based mobile internet. Growth of Internet of Things will bring many more new application scenarios to connected vehicles, and cars will become a key hardware carrier linking cities and families, and its platform role will become more obvious. More new opportunities will be generated focusing on City-Mobility-Family chain.

 

China will Lead the Race

Smart manufacturing based on internet and IoT is developing rapidly, we can imagine the scene of future automobile plant: Users customize the vehicle model and configuration online, and the system provides real-time assessment for its production cycle and price change. After confirmation, a variety of sharing, financial and logistics plans will be delivered based on the credit evaluation. In the back end, the information system will not only be connected with the vehicle factory, but also data of upstream and downstream firms. With cloud access to equipment maintenance, equipment will automatically seek related experts and take initiative to get maintenance while the end also reflects the changes to the maintenance time. The whole process can get a very quick modular optimization and adjustment based on market feedback.

Nike and Haier have already been showing great progress in this field and we are going to realize this in the vehicle industry where a very sophisticated supply chain already exists. Moreover, we are going to create more interesting methods and possibilities, which are limited in industries of clothing, home appliances and IT, etc. Great changes are going to sweep across global vehicle industry in the coming three to five years. And this time, China will lead the race and champion the world!

 

Further Information

Freeman Shen holds master’s degree of AMP at Harvard business school. He joined GEELY Group at age 39 and led his team successfully completed the largest oversea acquisition in the Chinese automobile history – GEELY’s takeover of VOLVO. Mr. Shen established WM Motor in 2015 and is the founder, Chairman and CEO. WM Motor is China’s emerging EV products and mobility solution provider. WM is abbreviation of “Weltmeister” (world champion).

Cover Story 4 - "The Sino-German Electric Vehicle Charging Project"

How to Meet China’s Challenges in the Electric Vehicle Charging Infrastructure
by SANDRA RETZER and HAOPING WANG

In recent years, E-Mobility has become a major topic for several countries worldwide. Due to challenges in the field of energy security, climate protection and air pollution in urban areas, the governments of Germany and China push the development of alternative propulsion systems in vehicles. The goal indicated in Germany’s “National Electro Mobility Development Plan” is to have one million Electric Vehicles (EV) by 2020 while China’s goal is to reach five million in New Energy Vehicles (NEV) production and sales by the same year. EV development has become a vital part in China’s national “Energy Saving and New Energy Vehicle Industry Development Plan (2012- 2020)” and an essential area in the national development strategy “Made in China 2025.” A well operating and interoperable charging infrastructure is crucial for the promotion and development of EVs. The Chinese government and the German government have been actively promoting the international exchanges and the cooperation in the field of Electro Mobility. In June 2013, both countries initiated the “Sino-German EV Charging Project” (SGEVCP), aimed at discussing solutions for EV charging and advancing EV market promotion and commercialization.

The SGEVCP is a scientific research project, which is conducted in several phases. The first phase focused on challenges in charging infrastructure facing private EV users; the second phase dealt with charging infrastructure construction and operation in semipublic areas; at present, the project is in its third phase, which will emphasize the applied research between future long-range Battery Electric Vehicles.

The project is approved and supported by the China National Development and Reform Commission (NDRC) and the German Federal Ministry for Economic Affairs and Energy (BMWi) as well as the German Federal Ministry for Environment, Nature Conservation, Building and Nuclear Safety (BMUB). The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and the China Automotive Technology and Research Center (CATARC), the German Association of the Automotive Industry (VDA) as well as automotive companies like BMW, Daimler and Volkswagen contributed to the project implementation.

 

Research Objectives

While Beijing was chosen as SGEVCP’s research site, the results of the studies as well as the policy proposals of this project are envisaged to support cities interested in improving conditions for a larger electric vehicle market. The project shall also serve as a basis for policymaking and the development of practical solutions to optimize conditions for the EV uptake in China.

Privately accessible EV charging infrastructure is complex from both a construction and operation point of view. The various responsibilities are borne by different stakeholders, and specific real estate conditions have a profound impact on the feasibility of establishing and maintaining charging infrastructure, particularly private charging infrastructure. Thus, the first phase of the SGEVCP evaluates the real estate situation for private EV users in Beijing. It examines the real estate situation in Beijing and investigated the attitude of Property Management Companies (PMCs) toward private charging, as well as the installation process of private charging facilities.

The second phase of the project focuses on charging solutions in semi-public areas to provide feasible charging approaches for those EV users not having access to private charging. An in-depth research on the status quo of EV charging in semi-public areas has been conducted to select typical semi-public EV charging areas, e.g. public parking spaces of residential communities, office buildings, government, and public institutions, as well as public commercial properties. Furthermore, practical problems of building and running charging stations in semipublic areas were analyzed by focusing on site selection of buildings, EV user behavior as well as empirical research on business models of operating charging stations.

Since the results of the third phase have not yet been finalized, the author focuses in the following of the main findings as well as the recommendations of the first two project phases.

 

Findings

Sound real estate infrastructure is the first precondition for installing and operating EV charging stations. Following the detailed investigation into the real estate situation in Beijing, the following can be concluded in the context of EV charging issues:

  • Access to private charging facilities is the basic enabler for the market introduction and broader market penetration of EVs in China. However, private charging facilities faces numerous challenges, including significant shortage in private parking spaces: In Beijing, for instance, only 7% of the residential communities fully meet the requirements in terms of parking, charging and property conditions. Further challenges for private charging is the lack of support from the property management, complex management and coordination before and after installation and limited electricity load in residential compounds.
  • Public parking spaces in residential communities, office buildings, public commercial properties, as well as government and public institutions are the typical semipublic areas. In Beijing, it is more feasible to install charging facilities in government and public institutions because of their sufficient parking spaces and the clear distribution of responsibilities of the property management.

In order to evaluate the demand of potential EV customers with regard to charging and related services, the project team conducted several surveys and interviews; additionally, driving and charging behavior data from certain test-drive vehicles has been analyzed. The results illustrate that:

  • Limited driving range is users’ greatest concern when driving an EV. Almost all users charged their vehicle overnight and more than one-third of the users charged their vehicle almost every day regardless of the remaining battery.
  • Private charging facilities are essential for purchasing EVs. However, semipublic charging facilities are an important supplement to the private charging facilities.
  • PHEVs are practical for consumers during the transition phase towards fully developed charging infrastructure.
  • The density of semipublic charging facilities should be enhanced and the charging facilities of different power capacity should be adjusted accordingly. In order to guarantee customers price stability, semipublic charging fees should be controlled. The total fee shall not exceed RMB1.5 per kWh.

For the successful development of the charging infrastructure, the establishment of sustainable framework conditions are essential. Currently, potential investors face challenges entering the market due to financial risks in operating EV charging stations. The project team conducted empirical research for business models of charging infrastructure and came to the following conclusions:

  • The payback period for a potential operator of charging pillars is very long. Governmental subsidies for the operator's electricity costs are more effective to decrease the payback period than subsidies for investment costs.
  • The utilization rate of charging pillars and the price of charging services are two of the most important factors, which affect the operator's payback period.
  • For users, the expenses for semipublic charging would be significantly higher than that for private charging due to different power tariffs and additional parking costs.

 

Recommendations

In light of these findings, the project team derives recommendations to the following stakeholders in order to improve the regulatory framework and accelerate the development of the charging infrastructure in China:

1. Government authorities

  • For compounds built in the future, the government should ensure that parking spaces for EV charging will be reserved to ensure efficient implementation of standard charging pillar installation in newly-built parking spaces in residential compounds. Moreover, the government needs to facilitate and accelerate parking space expansion and parking resource integration in existing compounds. The Chinese government in particular has taken this into consideration since the “EV Charging Infrastructure Development Guideline (2015-2020)” requires the parking spaces of all newly constructed residential buildings to be EV-charging compatible.
  • The government needs to support the development of fast charging technology especially for public and semi-public charging facilities since users do not accept long waiting times and request the possibility to charge their EVs on the way.
  • Results of business model empirical inquiry show that the payback period for the operator is relatively long. If the government would subsidize operators on relevant expenses, the general costs for the operator will decrease and its payback period will be shortened, therefore making investment in charging infrastructure much more attractive.

2. Automotive industry

  • The limited driving ranges of EVs are one of the main bottlenecks. EV manufacturers should focus on the development of EV technology, especially to improve the battery capacity of EVs.
  • Under the current circumstances of range limitations and charging facility deficiencies, PHEVs have practical benefits for customers in order to promote overall NEV development and to reduce adverse environmental impacts.

3. EV Charging Operators

  • Customer research shows that when EV users have to share charging facilities with other users, they need timely feedback on the charging status of those charging stations. An intelligent charging network, which includes users, charging facilities and vehicles, is necessary for the acceptance of semipublic charging stations. In the future, based on the intelligent charging network, virtual payment of charging fees, real-time updated information systems, charging facility reservation, navigation etc. can be realized and semipublic charging facilities will be more convenient to use.
  • In order to meet the charging demands of EV-users, the density of semipublic charging facilities should be increased accordingly. Meanwhile, fast, and normal charging facilities should be distributed in a reasonable proportion in semi-public charging areas.

 

Further Information

Sandra Retzer serves as Head of “Sustainable Urbanization, Transportation and Energy” of GIZ China and is responsible for Sino-German policy dialogues and technical cooperation projects in the field of energy, electro mobility, low carbon transport and sustainable urbanisation. In the past 20 years, Ms. Retzer has been primarily based in Germany and China working for different transnational companies in large-scale infrastructure, airport, renewable energy and energy storage projects.

Haoping Wang works in GIZ since 2012 and is mainly responsible for the Sino-German Cooperation Project on Electro Mobility. Within this project, experts from both countries under coordination of GIZ work together on issues like market development of electric vehicles, norms and standards as well as charging infrastructure. Haoping holds a PhD in economics from the Darmstadt University of Technology.

Cover Story 5 - The Future of Electric Vehicles and Industry 4.0

Something Old, Something New, Something Borrowed and Something Green
by QIAO LIU

There are so many new words popping up each day: Electric Vehicle, Industry 4.0, Artificial Intelligence, Human-Robot Collaboration, UAV etc. probably sound familiar. This article seeks to further explain them to the reader.

 

Something Old

Technically, electric cars are not completely new, since the major parts of a car remain the same, except the power source. It is well-known that a car, automobile, or auto, whichever name you prefer to use, is actually a wheeled, self-powered motor vehicle that you would choose for transportation. For the near future, no matter how the automotive industry changes, vehicles will still have wheels, engines, and similar car bodies. Also, the production will remain the same.

The auto industry has developed rapidly over the past decades. In 2016, more than 28 million cars were produced and sold in China. However, this massive production is also accompanied by environmental issues. It has been argued that vehicle exhaust is a major pollution source and electric cars are brought forward as a solution to help with this situation.

 

Something New

The electric vehicle industry began at the turn of this century and has been rapidly developed internationally. As you are already aware, the power system of electric vehicles is different from petroleum or gas powered cars. For electric cars, the energy stored in a series of batteries is used for vehicle propulsion. Electric vehicles are known to enjoy faster acceleration but shorter driving range than conventional engines. Although electric vehicles do not produce exhaust fumes, they require long charging times. Pure electric vehicles can drive about 150 km before it needs to be recharged for six to eight hours. There are companies focusing on improving the battery capacity and service life, and this is where the super battery comes in. The application of new material has greatly enhanced the charging rate. Therefore, greatly improving the user experience of electric vehicles, conducive to the diffusion of electric car.

In June 2016, the International Energy Agency (IEA) released the report 2016 Global Outlook for Electric Vehicles, which included an analysis of the electric vehicle’s development and the market potential. The report highlighted that over the past decade the cost of electric cars has fallen fast while performance has been continuously optimized. Since 2008, the cost of batteries declined four times and the energy density has been a fivefold increase. Although technological advances will enable a cost reduction in future years, in 2016, electric cars still only had a market share of 0.1% of the global auto market share. However, there is a rapid growth in this field, which means more opportunities for this “new” industry. According to China Association of Automobile Manufacturers (CAAM), a total of 517,000 new energy cars were produced and 507,000 units were sold by the end of 2016, which is a 51.7% and 53% growth respectively compared with the previous years. Among these vehicles, the pure electric vehicle production and sales were 417,000 and 409,000 respectively.

Auto giants and newcomers in automotive industry, such as Tesla, not only see those opportunities, but also use them to become an important player in this field, while some traditional players still struggle with cutting price to fight for a bigger market share in the old power system car market. Of course, the traditional players know more about manufacturing car bodies, wheels and interior design, and they will not simply let their shares been taken away by the newcomers. As for these traditional auto giants, Toyota has brought out the Mirai (Japanese for future) hydrogen electric car which they call the future; Chevrolet came up with the Bolt pure electric car which has more space in the back than Tesla’s Model X and costs half the price; BMW’s i3 electric car came out carrying a pure electric motor system with maximum power 170HP. There are 11 new licenses given out by China’s government for electric vehicles production qualification/permission and this number keeps going up.

 

Something Borrowed

Industry 4.0 is all about creating transparency and being connected. Since this concept certainly fits well with electric cars, it is not surprising that the electric vehicle industry has begun to embrace Industry 4.0. This should be considered something “borrowed.”

Currently, auto giants are doing manufacturing experiments under the Industry 4.0 concept. For instance, by connecting robots and other equipment via tablets they can monitor manufacturing statuses and to be informed ahead of time if a machine needs to be changed.

The last step of Industry 4.0 is to let machines and systems work intelligently: By using cloud technology and all connected machines customized electric cars can be realized.

How will we buy electric cars in the future? Imagine you want to buy an electric car with your name on it. Since you may have a preferred car brand you visit that brand’s website and order system After you have found your preferred car shape, door size, seating material etc. you put them all in your shopping cart and don’t forget to input your name before you finally click yes to order.

Before the manufacturing of your customized electric vehicle begins, the manufacturer checks your order and gives the permission to start the production via their phone. While different raw materials go through certain working stations to be pressed into certain shapes, welded into certain parts before being connected with each other, suddenly, the Automated Guided Vehicle that carries certain parts of your car discovers in its system that the next station will break down in five seconds because one of the ten machines is going to be maintained. The AGV quickly searches through its system and finds another station will be ready in ten seconds. The system automatically redirects the vehicle parts to the other station, which is a Human- Robot-Collaboration with five machines and one human. Step by step, your customized electric car is being shaped by your preferred manufacturer. Of course, your name was also painted the way you wanted before it even went to the distribution center.

The next day, your car will be delivered to your door. Before you sign the final acceptance, you are allowed to carry out a test run. Your car not only drives itself but also has a built-in artificial intelligence system, which can tell which road has less traffic and more convenient stores. Even though as a customer you may not really care about Industry 4.0 or how your car is being manufactured, choosing your preferred car and your preferred drive power system certainly make you satisfied, right?

 

The manufacturing system is so smart that your car is going to be delivered right on time before you know there was a shutdown of some parts in your car manufacturer’s factory.

 

Something Green

Since smog became a big topic among the Chinese, China’s government has started to monitor the air quality on a daily basis and publishes it on public channels. It is crucial and urgent to use new energy sources. Beijing is ready to gradually replace fuel and gasoline taxis with new energy vehicles. Hopefully, the surrounding provinces will follow this example help to popularize electric vehicles.

For 2017, the Chinese government plans to add 800,000 new charging stations in order to support the continued growth of the new energy vehicle market, in which public and non-public charging stations are, 100,000 and 700,000 respectively; those charging stations are mainly used to meet the recharge demands from taxis, buses and commercial vehicles to recharge. These new charging stations will mainly be placed in cities and on highways.

The Chinese government funds traditional auto giants in order to increase their interests in producing more electric cars while general rules are given to lower the exhaust as well. Battery power is the heart of electric vehicles, the new national subsidy policies show that the pure electric car power batteries system mass and energy density shall not be less than 90Wh/kg, but subsidies are 1.1 times higher for vehicles greater than 120Wh/kg.

In the meantime, China is increasing its limits on auto emission standards including average fuel consumption, emission standards and emission warranty. The new regulation requires not only new cars, but also cars with emissions exceeding certain national thresholds be returned to the factory.

As the EV industry scales up, cost for manufacturing batteries, motors and power electronics are going to decrease. In the future, the focus will be less on internal combustion engine vehicles than in the past 20 years. The industry can look forward to a fast developing and successful future. We can all hope to see a greener future soon with the help of the rise of the electric car industry.

 

Further Information

Qiao Liu has a master degree in advanced management from the University of Bath, one of the top five business schools in the UK. She has been working for KUKA Systems for five years, in England and China. KUKA Systems China is a leading automation solution provider and plays an important role in leading Industry 4.0. She can be reached at qiao.liu(at)kuka-systems.cn.

Cover Story 6 - The Time is Now

E-Mobility in China
by PROF. DR.-ING. TONG ZHANG

With a production of more than 517 thousand New Energy Vehicles in 2016, China was clearly the Number One worldwide regarding E-mobility.

Compared with 2015, the number of battery only electric vehicles (BOEV) has increased dramatically with a gain rate of more than 84% for passenger cars and 4% for commercial vehicles. The situation for the hybrid, incl. plug-in hybrid vehicle was mixed with a plus and minus of 27% for passenger cars and commercial vehicles respectively.

The market trend reflects the Chinese New Energy Vehicle development strategy, starting with full electrification, first in commercial vehicles before moving to passenger vehicles. By maintaining the dominant market position of the new energy commercial vehicle, the gain of battery electric car in 2016 also shows the long anticipated entry into the private car market. Although the private purchase of electric cars was mainly driven by the strict license regulation of traditional cars in big cities like Shanghai, Beijing, and Shenzhen, it still could be seen as the real beginning of the electric passenger car era. The scandal of the false subsidy fraud by a handful of vehicle manufactures and the resulting uncertain government support policy last year were the main cause of gloomy sales results in the electric commercial vehicle sector.

Addressing Major Roadblocks

Before we could believe that China would continue this stunning E-mobility development speed, Chinese private customers raised the major road blocks for the widespread use of E-cars:

  • not enough public charging pillars and stations; lack of charging conditions at home;
  • not interested, need to charge too often;
  • long charging time, driving range anxiety.

For the years ahead, China has already set a very ambitious target: The average fuel consumption of new passenger cars has to be:

  • 5.0L/100km by 2020,
  • 4.0L/100km by 2025,
  • 3.2L/100km by 2030.

Based on 2015, the decrease of the average fuel consumption for commercial vehicles must achieve:

  • 10% by 2020,
  • 15% by 2025,
  • 20% by 2030.

This radical fuel consumption goal, coupled with the panic caused by smog and haze that currently dominate the Chinese weather forecast, result in further intensive and heavy investment in the pure electric vehicle development and production in China. A final successful market of E-Mobility also depends on the government subsidy policy, charging infrastructure and, last but not least: Changing the mindset of the private customer. Only the social responsibility, eagerness of younger generations for future technology, car sharing and readiness to move towards other traffic tools for long distance travel will finally secure a sustainable E-Mobility Boom.

 

Defining the Coming Trends

In 2016, the Chinese government published about 18 policies and regulations. Accelerating the battery charging infrastructure construction becomes crucial and the automobile companies must give up their dependency on government subsidies. In general, based on the positive sales figures in 2015 and 2016, in the coming years, the following trends will be seen in the development of Chinese new energy vehicles:

  • a confirmed national strategy focused on new energy vehicles;
  • fuel consumption limitations and new energy vehicle credits for passenger cars will operate in parallel;
  • stricter regulations for battery performance and production with the purpose of consolidation;
  • greater focus on battery recycling;
  • strict entry threshold for production and enhanced monitoring, especially for safety, will be in place for all operation periods of new energy vehicles.

Back to the original demand for developing new energy vehicles worldwide, independence from fossil fuels and reduction of CO2, China has an additional third requirement: The domestic automobile industry transition. For many years, the foreign automobile industry has focused on the hybrid vehicle concept. Starting with Toyota's successful model "Prius," Japanese, American, and European OEMs have launched various hybrid vehicle models on the markets. Building their core technology superiority and expanding their advantages over the Chinese automobile industry for decades. For the internal combustion engine (ICE), advanced transmission and the combination of ICE and an electric motor, sophisticated technology is essential.

 

Smart Strategy

By realizing and acknowledging the foreign advantage, China set out with a smart strategy to start work on BOEV. The BOEV concept is relatively simple and the technology threshold for Chinese OEMs and suppliers is low. Beginning in 2000, and continuously supported through three "Five Year Plan[s]," the joint efforts by government, OEMs and suppliers leads to the number one electric automobile industry and market. The hybrid vehicle, despite its clear economic advantages and independence from charging stations, is excluded from the government subsidies and rarely seen on Chinese roads.

Based on the dominant market position and profit return of BOEV, by further expanding their market share and the domestic suppliers becoming more mature, the Chinese manufactures then began to enter the hybrid vehicle sector, beginning with plug-in hybrids, and moving on to normal hybrids. They also see the charging infrastructure will not admit a limitless market share of the BOEV, especially for private owners.

With more and more public charging pillars and stations in place and also easy access to charging at home, as well as the Chinese government’s virtually mandatory policies, China will remain the number one market for the electric vehicles, incl. BOEV and the plug-in hybrid vehicles. With further economic growth and urbanization, coupled with cash subsidies, and the restriction or even total ban of non-electric cars from entering the inner city, will all play even a bigger role in promoting the market entry of electric cars.

 

The Time is Now

A prosperous electric car market in China is also good for whole automotive industry worldwide. Just like what happened on the traditional car market, E-Mobility in China will also offer opportunities to foreign car manufactures. Unlike the situation of Chinese car market and industry 20 year ago, the foundation of an electric car boom is happening now.

For the foreign manufactures, now is the best time to enter the Chinese electric vehicle market. Based on the OEM's global brand, strong integration technology and a high-quality supply chain, the western car manufactures have good chance of gaining a share of E-Mobility in China. The focus should first be on the passenger car, where a fair competition with the local manufacturer could be secured due to the higher demand on technology and stricter car approval procedures. If they start with plug-in hybrids, where they already have strong knowhow and long manufacturing experience, the western car manufactures could capture, even dominate the middle and high segment car market. Of course, unlike most existing foreign models, the car must have a pure battery driving range higher than 50km, to be able to acquire a variety of incentives in China.
In the field of BOEV, the competition with local OEMs will be more intense. The Chinese manufactures have already built their own technology system, manufacturing process and a pretty complete Chinese supplier chain.

To be able to repeat success equivalent to the traditional car market, the foreign automobile manufacturer has to focus on the model policy, supplier chain and cost.

 

Middle and High Quality Electric SUVs

Foreign OEMs in China have already experienced success by beginning with the plug-in hybrids, then expanding into BOEV, the opposite of the Chinese strategy: Starting from BOEV, then moving into plug-in hybrid, if they continue to follow the different model policies success will continue. Starting with the top-down principle, the high and middle class model is also appropriate for electric vehicles. The dominance of SUVs on the Chinese car market in 2016 must also be considered. In 2016, for every 1,000 cars produced in China, there were 375 SUVs, an increase of 45.7% against 2015. This trend is expected to continue and a fast electrification of the SUV is very likely. The foreign OEMs in China need to rethink their model portfolio and launch the right model mix on the Chinese market. A high-quality middle or high class electric SUV, plug-in hybrid or BOEV, will certainly polish the OEM's brand and promote the market share. Foreign manufacturers are going to face further challenges with the supply chain in China. Until now, western OEMs in China have mainly relied on big global suppliers, especially for high technology and quality systems and components. All big suppliers have already set their local manufacturing plants near the OEM in China, but not for parts needed for hybrid and electric vehicles. A quick localization needs the investment and the time. An accelerated assessment of Chinese suppliers and a selective patient collaboration locally seem to become inevitable.

When compared to the traditional vehicle, the never-ending efforts to reduce costs for electric vehicles need to be further strengthened by foreign manufactures. The foreign suppliers and OEMs must defend their high quality and high costs against the local Chinese attitude of "good enough" as well as their low costs. In the future Chinese car market, especially for the electric cars in middle and low segment, an intensified competition between foreign and Chinese manufactures will come, and sooner than most of us could expect.

 

Further Information

Prof. Dr.-Ing. Tong Zhang studied and worked in the automobile industry Germany for twenty years. He has eleven years’ experience in New Energy Vehicle research and development in China. Prof. Zhang is now the Director of the Academic Committee, College of Automotive Studies of Tongji University in Shanghai. He can be contacted via: tzhang(at)tongji.edu.cn.

Cover Story 7 - The Invisible Benefit

High-speed Mobility in China
by MAJDI ALHMAH

With an estimated 130,000km of rail lines, China ranks second in the world behind the USA for the longest railway length with Germany weighing in at 41,315km.

However, when it comes to high-speed railway length, China ranks first globally and exceeded 22,000km railway length in September 2016, Spain comes second in the world with 3,100km and Germany third with 3,038km. The length of China's high-speed rail is greater than the combined length of all high-speed railways in the world. This staggering achievement was made just in ten years, and my tenure in China has started since then.

In the past decade, China has been building an extensive high-speed rail network to upgrade its existing railroad network. The plan was to build eight high-speed rail corridors, four verticals and four horizontals with a total length of 12,000 km. Later this plan was revised to sixteen high-speed rail corridors, eight verticals and eight horizontals, to be completed before 2025. The average length per corridor line is around 1,500km and the actual length could range between 800km to 2,500km.

The high-speed railway network in China is divided into two major categories:
1. Electric Trains or EMU Trains: With operational speed at 200km/h with 250km/h as the maximum.
2. High-speed Rail: These trains run at 300km/h operational speed with a maximum of 350km/h.

 

The Operator

This huge rail network is managed by China Railway Corporation (CRC), the predecessor of China Ministry of Railway, which was split into two, a transformation that took place in 2013 with the aim of liberalizing the industry and increasing the efficiency, and to deal with a USD880 billion of debt. CRC has two million employees on its payroll and manages assets valued at around USD one trillion. CRC spends around USD100-130 billion annually mainly on constructing new rail lines. In 2017, the budget is RMB 800 billion equal to USD117 billion.

 

The High Cost of Mobility

The big push for bullet trains evoked criticism since except for the Beijing-Shanghai line, most of the other high-speed lines were not found to be profitable. While the vast network has enhanced connectivity in the country, construction of lines lags in the less developed western regions. To address this gap, much of this year’s planned projects will happen in central and western regions, to support the wider poverty-relief campaign.

The ticket price for high-speed rail in China is set very low, among the lowest in the world. For example, to travel between Beijing and Shanghai using the 300km/h high-speed train - a distance of around 970km the ticket price for a standard seat is RMB500 or around USD80, for business class it's RMB930 and RMB1,750 for first class. Using the slower 200km/h high-speed train or the electric train, the ticket price significantly decreases to RMB300 or around USD44. The same trip distance in Europe might cost double or triple this ticket price or even more.

When traveling on a high-speed train in China, it's common to see students carrying their luggage moving from one city to another, it's also common to see villagers carrying large bags of fruits and vegetables exploring storage places for their belongings.

 

The Invisible Benefit of High-Speed Mobility

This affordability has made large contributions to people’s mobility and economic efficiency. In 2016, China high-speed rail logged a record ridership of 1.44 billion. Assuming an average trip duration of 6 hours (a conservative estimate for China), such a trip could have lasted 18 hours using conventional trains or public transportation. This could mean more than 17 billion hours were saved and those who traveled had more time to spend elsewhere rather than riding transportation or on a traditional train. In monetary value, this fast mobility can contribute toward greater economic efficiency. If half of these passengers were part of the country workforce, and the economic cost per labor hour is set conservatively at RMB25 per hour, it means China has saved its economy an astonishing RMB216 billion compared to using trains with speed of 80-120km. While this value isn't directly shown under CRC financial achievement, but it's certainly contained in other industries in the overall national economy.

This convenient mode of transportation has given China improved workforce mobility between cities and distant regions. A 72-hour train trip can now be made in just 12 hours. The mobility can play a major role in stimulating intra-nation economic competition.

Several new generations of high-speed trains are under the R&D work. New trains will have WiFi service, some trains will come with beds. New non-stop lines are being introduced on major rail lines. For example, the trip between Changchun city, the industrial hub of Northeast China, and Beijing is around 1,000km and usually takes 4-4.5 hours, with a nonstop line the time will be cut down to three hours. The 3,000km trip between North and South China can be made in around 12 hours. It's all about speed, the speed of transportation can accelerate the speed of economic growth.

The high-speed rail contributed largely in the development in different industries. The construction of a high-speed rail line required the combination of more than twenty core technologies and many of these technologies could be utilized in other industries like: Aviation, automotive, and construction. A huge amount of technical railway construction and manufacturing know-how were brought into China from different countries around the world including: Germany, France, Italy, Canada, and Japan.

 

The Future

The rolling stock builders' R&D departments are racing toward building faster trains that can operate safely at speeds around 400km/h. In one computer-aided experiment, the goal was to achieve 600km/h speed and it was successfully done via a computer simulation, though some technical issues were reported regarding the durability of some of the mechanical structural parts. I know this might sound beyond the laws of physics, but I wouldn't jump to conclusions too quickly. These ultrahigh- speed trains can connect continents. Maybe after a decade or two, you will have to choose between taking the ultra-high-speed train or a flight for your China-Germany trip.

 

Further Information

Majdi Alhmah is General Manager of BFG International China, a major OEM equipment supplier for China high-speed trains and rolling stock. One of the few foreign executives who has witnessed the whole development of China High-speed rail industry. Mr. Alhmah is also the founder of JobTube, China's leading international recruitment platform. In 2013 he received the China Government Friendship Award from the China Deputy Premier for his contribution in the development of China economy through his railway factory and the contribution of the recruitment platform in attracting foreign talents to come to work in China. He can be contacted via majdi.james(at)bfginternational.com.cn.

In the Spotlight - ASEAN: Economic Dynamism Regionally and Globally

Interview with Peter Kompalla, Executive Director of the German-Philippine Chamber of Commerce and Industry and of the German ASEAN Business Council from the Philippines
by SIMONE POHL and OLIVIA HELVADJIAN

The Association of Southeast Asian Nations, or ASEAN is a major hub of manufacturing and trading and one of the fastest-growing consumer markets in the world. As the region develops its economic profile, rising wages and labor costs in neighboring countries like China also help ASEAN to gain momentum. On the occasion of the ASEAN breakfast organized by the German Chamber of Commerce in China | Shanghai, German Chamber Ticker had the opportunity to speak to Mr. Peter Kompalla, Executive Director of the German-Philippine Chamber of Commerce and Industry and of the German ASEAN Business Council from the Philippines, on the potential, trends, and challenges in the region.

You have recently published the AHK ASEAN Business Climate Study, can you share the key findings? What are the main challenges for German companies in the region?

In our recent survey, more than 250 companies from 13 industries such as automotive, chemicals and pharmaceuticals, engineering, extractives, consulting and other services were surveyed, out of which 88% have business activities in ASEAN. According to the results, the three deciding factors for engaging in business activities in ASEAN are the economic stability (91%), skilled labor (88%), market growth rate (86%), followed by factors such as level of corruption, pricing trends, market size and demand variability (all of these are over 60%).
In a nutshell: Companies already present in ASEAN are very positive about the prospects: 53% expect an improvement of the business outlook, 60% expect more sales, and 77% are planning to expand their businesses in the next five years. Generally, Foreign Direct Investments (FDIs) doubled in ASEAN in the past ten years and German FDIs are lagging behind with currently USD 1,287mn.
However, inhibiting factors for more engagement are the perceived increase of bribery and corruption, which rose from 17 to 21% (from 2015 to 2016), the lack of skilled and qualified labor, rising from 5 to 18%, and the political or regulatory instability, which did not change (17%). Overall, a majority of 80% is disappointed by the much-anticipated ASEAN Economic Community 2015 because a deeper integration was expected. The harmonization of standards is still an ongoing process, only 20% of the respondents agree that the market access and inter-regional trade was simplified.
Further challenges are the rise of non-tariff barriers and infrastructural challenges, but the succeeding agenda of the AEC Blueprint 2025 shall improve a more seamless move of investments, bring improvement in terms of skilled labor, and more integration and cooperation in science and technology and better governance and connectivity.

What are the main characteristics of the ASEAN market? What generates its attractiveness?

In comparison to their emerging peers, ASEAN countries have been remarkably stable amid the global slow down, the ASEAN GDP is equivalent to two thirds of Germany’s and bigger than India’s and the volume of FDIs is approaching that of China. One of the factors for the region’s attractiveness as a low-cost manufacturing hub results from the wage increases in China (40% in the past 5 years) and their stricter implementation of environmental regulations. Internal factors such as improvements in the Ease of Doing Business and investment incentives have also contributed to the attractiveness of the region. The diversity of ASEAN countries in their manufacturing sophistication and in their wage levels allows the split of high end and low end production, so the region potentially becomes one large production base. Vietnam and Philippines in particular draw the attention of manufacturers with growth rates above 10% in manufacturing, but generally, all ASEAN countries increased in their global rankings of Ease of Doing Business.

Unlike the EU, most of regulatory changes for the Ease of Doing Business in ASEAN are on country-level. On the one hand, a fast harmonization for regional standards in order to improve the business climate is rather unrealistic, due to the no-intervention tradition. This tradition, on the other hand, makes ASEAN-interpolitical turmoil rather improbable. It would be unlikely that one of the member states leaves the trade bloc. Having a very young workforce, with half of the population below 30 years old, is clearly an advantage but this means that ensuring solid education according to the industry’s needs is also of utmost importance, because finding qualified and skilled people is increasingly perceived as a challenge by companies (a rising concern from 5-18% from 2015 to 2016). Therefore, the further development of dual vocational training in the region is a valuable contribution to support the demand in skilled labor.

What can ASEAN countries do to attract more foreign investments? What are the risks?

Currently, national protectionism remains an issue. Even though tariff barriers have largely been removed, non-tariff barriers still make trading in ASEAN a complex matter. In the year 2000 there were 1,800 non-tariff barriers and in 2015 they had increased to 6,000 leading to increased cross border red tape. Therefore, greater efforts in policy-making with the goal of unifying the systems and bringing in simplified online processes are necessary. Also, custom surcharges, advanced import deposits or cash requirements need to be removed. On a positive note, majority of tariffs have been removed. 70% of total trade among ASEAN is done with zero tariff and only a 10% tariff applies to 5% of the total trade.

As mentioned, trading can be challenging due to extreme bureaucracy and excessive administrative processes, such as requirements making governmental agencies the sole importer of goods, but also in terms of weak infrastructure and connectivity such as streets and ports, ASEAN still needs to support the development of its supply chain. Especially when compared to China, which has extensively developed supply chains and is still considered the workbench of the world making it an interesting and competitive investment location.

Considering the large share of SMEs of the overall German economy, which opportunities does the ASEAN market hold especially for SMEs? What are the most successful German product areas in the ASEAN region?

It is important to point out that ASEAN economies are structured differently, consisting of a large set of players, ranging from very big ones to also very small businesses, in comparison to Germany which is characterized by its large share of SMEs representing the backbone of its economy. Nevertheless, there is a lot of potential for many German SMEs, especially those with state of the art niche products, in the field of technology solutions, environmental technologies and in infrastructure and in areas in need of further development such as energy and mobility. Urbanization and population aging are also gaining importance in ASEAN and need sustainable solutions. The growing health industry, and increased consumption in food and luxury goods (fifth biggest car market globally), all represent valuable opportunities for German SMEs.

We all appreciate a good success story. But do you perhaps have an example of a failed attempt of entering the ASEAN market? What were the lessons learned?

There is the necessity for adjusting products to the ASEAN markets, as well as the need to create or “educate” the market – particularly for innovative solutions, comprehensive explanations, trainings of partners and continuous support of customers is crucial.
What can be challenging when entering the market, is to make the right choice among the various ASEAN countries, some being very advanced in their development but also characterized by fierce competition or others, being less developed with fewer competitors on the market. Therefore, strategies should vary, also because of the diverse cultures and languages. This is where the local AHK is a strong partner to support businesses in their market entries. How do you define the ASEAN consumer? As a point of comparison, the Chinese consumer market is currently dominated by e-commerce and an increased thirst for luxury items – what’s the situation in the ASEAN region? Consumer spending in ASEAN increased by 30% from 2009-2014, as a single market the ASEAN is the eighth largest globally with 633mn people and will have a middle-class population of around 400mn by 2020, hence consumer spending is higher than in Italy, Brazil and India and is expected to increase within the next five years with the GDP per capita to rise by 6.5% in purchasing power. However, ASEAN countries can be grouped into two categories; the lower developed ones will clearly increase their purchasing power, while the developed countries are rather slow in this regard, but will still be interesting in global economic terms. As mentioned earlier, the ASEAN region is very varied and so is the ASEAN consumer market. It cannot be generalized or compared to the homogeneity of the US or China. It is characterized by different cultures, religions, tastes, laws and history. Diversity not only applies among ASEAN members, but also domestically among economic classes and regional differences, urban vs rural, religious, and cultural differences within a single country. So, there is a high necessity to localize products. Generally, we can say that it’s the middle and upper class that is consumption-oriented and aware of trends and brands. One thing in common are the three main trends in consumption, which are the same across all countries: Leisure, luxury products and education. Maybe the following description of the ASEAN consumer market could be: “big, young, and interested in innovative service providers or technology,” since digital penetration is soaring with regard to gadgets like cellphones and internet usage.

Looking ahead and considering the diversity of the ASEAN region, who will be the key players in the ASEAN region in the next two decades?

We hope that in the long term, the ASEAN region will be a single market with a deep integration, not only trading in goods, but also in the free movement of service, labor, and capital – a single market of vibrant exchange and equalization.
We are aware that in comparison to the EU, the ASEAN integration process will be a slow development, partially due to the no intervention tradition and because of its nature as an interest group. However, the whole region develops strongly with a benefit to all FTA partners like China, India, Japan, or South Korea. More specifically, Singapore remains the important financial and logistics hub in the region. Based on the current competitiveness and market size the countries with emerging interest could be Indonesia, Philippines, and Vietnam since together they account for the majority of population. Also, due to recent economic reforms, the Philippines and Vietnam, have witnessed exceptional improvements in global rankings of Ease of Doing Business.

Based on your extensive experience in the ASEAN region, what’s the perception of ASEAN countries of China and its role in regional and global trade?

On the one hand China and ASEAN countries are traditional trading partners. ASEAN opened their doors for Chinese investments, for example in infrastructure, boosting the regions competitiveness further. China is also committed in enhancing the infrastructure in the region, especially by spearheading the Asian Infrastructure Investment Bank and pushing forward the One Belt One Road initiative. On the other hand, there is of course ambivalent relation with China as a new global power. Nevertheless, more pragmatism from ASEAN through economic bonds than political concerns can be expected since the ASEAN region wishes to benefit from its strong neighbor and looks up to China’s strong initiative and vision.

Conversely, in which ways is the ASEAN region interesting for China?

ASEAN’s overall economic growth and China’s own rapid expansion are contributing to economic dynamism on both a regional and global scale. Both are experiencing rapid integration into the global economy, and are quickly being absorbed into the evolving global supply chains and taking on the role as factories to the world. Therefore, there is a natural gravitation towards each other as production bases with geographical proximity, historical ties, and shared cultural affinity. ASEAN can be seen as a geopolitical oasis, helping to support peace and stability in the region, which again is beneficial to China. Lastly, 2017 is also the year of the ASEAN-China Tourism Cooperation, reflecting the interest of China’s middle and upper class tourists in the region.

Geared towards our German and international readers, what misperception(s) regarding the ASEAN region would you like to clear up?

The simplification of ASEAN as one market. ASEAN is not the EU in many ways: There is no customs union in place, and also will not be in the near future. When EU companies export to ASEAN, each state applies its regulations, unlike when ASEAN exports to the EU. Another unlikely development is a monetary union. All these differences to the EU should be taken note of. However, these aspects do not lower ASEAN’s potential. Looking at the positive developments in China-ASEAN relations and a deeper integration in Asia in general with the negotiations of the Regional Comprehensive Economic Partnership (RCEP), it is important that German companies do not fall behind and miss the vast awaiting opportunities.

Mr. Kompalla, many thanks for your time!

Mr. Peter Kompalla, Executive Director of the German- Philippine Chamber of Commerce and Industry and of the German ASEAN Business Council from the Philippines speaking with Ms. Simone Pohl, Delegate and Chief Representative of the Delegation of German Industry & Commerce and Executive Director of German Chamber of Commerce in China | Shanghai and Ms. Olivia Helvadjian, Communications Manager German Chamber of Commerce in China | Shanghai and Editor-in-Chief, German Chamber Ticker.

Features 1 - The Booming Electric Age

FEHLEN BILDER

China’s Policies for E-mobility Manufacturers and Legal Responsibilitiesby DR. ULRIKE GLUECK and EMILY XU

The automotive industry in China has become the largest in the world. The fast development of the automotive industry has brought considerable benefits to consumers, but also contributed greatly to environmental pollution. As reported by the media, automobile exhaust contributes a fair share to air pollution in most big cities. Therefore, the development and promotion of new energy vehicles (NEV) has been put high on the agenda in China. In the 13th Five- Year Plan, the government plans that by 2020 the annual production of e-mobility shall reach 1 million units. In order to realize this goal, the government has implemented or drafted various policies and rules to support and speed up the development of e-mobility, e.g. exempting Vehicle Purchase Tax on certain kinds of NEVs, developing e-mobility infrastructure nationwide, paying subsidies for the private purchase of NEVs etc. It is expected that, China will become the largest market for e-mobility in the future and that the booming electric age is coming.

However, with the rapid development of the e-mobility industry at the same time people begin to pay attention to the quality and safety of e-mobility. According to statistics from the Ministry of Industry and Information Technology (“MIIT”), there have been altogether 31 NEV safety accidents since 2009 and the frequency is increasing. For e-mobility the situation is even worse. The most common problem of e-mobility, which consumers have to face, is the safety and stability of batteries, for example the battery runs out too quickly, heats up or catches fire.

 

Lack of Recycling

Other than problems of product quality and safety, the recycling of products, especially of batteries, also constitutes a big problem for the environment. Originally, e-mobility was environmentally friendly, but if waste batteries cannot be recycled in an appropriate way, it will still bring a lot of damage and pollution to the environment. Compared with the research and development of e-mobility itself, the management of its recycling system in China is still at the starting phase.

All of the aforementioned problems have become an obstacle for the development of e-mobility. To solve the problems and realize the goal of the 13th Five-Year Plan as scheduled, the Chinese government has recently issued some circulars and regulations to alert e-mobility producers to put more efforts into product safety and environmental protection, which means that e-mobility producers shall undertake more responsibilities in the future.

 

1. Enhance Product Safety Responsibilities

On 11th November 2016, the MIIT issued the Circular on Further Enhancing the Safety Oversight of New Energy Vehicle Promotion and Application (“Circular”). The Circular for the first time introduced a supervision mechanism for the quality and safety of NEVs, which imposes specific obligations on manufacturers from three perspectives: (i) NEV manufacturers shall bear the primary responsibilities of product quality and safety, (ii) local governments shall effectively supervise the safety of NEVs, and (iii) industrial associations such as China Association of Automobile Manufacturers shall enhance the supervision of NEV manufacturers and technical support to NEV manufacturers. Obviously, e-mobility producers have to undertake more responsibilities than before and have to pay much more attention to product quality and safety. The Circular emphasizes the following obligations imposed on e-mobility producers:

(1) E-mobility producers shall improve product quality and safety. More efforts shall be put into the research and development of NEVs, with special focus on product quality. E-mobility producers shall also reinforce the management of suppliers in order to control the quality of automobile parts. The Circular expressly states that from 1st January 2017, for the time being, all new energy buses manufactured thereafter shall be subject to the requirements of the Safety Specifications for Electric Buses attached to the Circular, until a national standard for electronic buses has been introduced.

(2) It must be possible to supervise the safety status of e-mobility at any time. From 1st January 2017, all new NEVs manufactured thereafter must be equipped with in-car IT terminals so as to upload the information related to the safety status of vehicles to the monitoring platforms. Further, the enterprise monitoring platforms shall also be able to be accessed by the state monitoring platform so that the Chinese government can supervise and inspect it at random.

(3) For NEVs that have been sold, e-mobility manufacturers shall provide free services to upgrade and transform in-car IT terminals, communication protocols and other related monitoring systems according to national standards, and strive step by step to connect such systems with monitoring platforms.

(4) In addition to the aforementioned obligations, e-mobility producers shall also take measures to improve the quality of the after-sales services, especially the regular examination and maintenance of the battery and its related parts. E-mobility manufacturers shall set up relevant filing systems to record the safety status of the e-mobility that has been sold. For e-mobility that has been sold, the manufacturers shall provide free services to upgrade the charging interface according to the national standards.

 

2. Extend Manufacturer Responsibility System

On 25th December 2016, the State Council approved the Plan for Promoting the Extended Producer Responsibility System (“Plan”), which contains the manufacturer responsibilities of automotive products and emphasizes the establishment of electric vehicles’ battery recycling system.

a) The Plan imposes an Extended Producer Responsibility (EPR) System on manufacturers, which means that a manufacturer’s responsibility to the environment for its products is extended from the production stage to the entire life cycle including the product design, circulation and consumption, recycling and waste disposal.

b) In addition, according to the Plan, e-mobility producers have two responsibilities, one is the recycling of discarded vehicles and the other one is the recycling of waste batteries.

(1) First, all vehicle manufacturers, including e-mobility producers shall have responsibility for the recycling of discarded vehicles. E-mobility producers will be encouraged to use after-sales service networks to establish a reverse recycling system with qualified dismantling enterprises and re-manufacturers in order to recycle discarded vehicles more efficiently.

(2) Secondly, the state is going to establish an electric vehicles’ battery recycling system. The manufacturers of electric vehicles and power batteries shall be responsible for the establishment of a waste battery recycling network. E-mobility producers shall use after-sales service networks to recycle used batteries, collect and publish the recycling information, and ensure that the used batteries are recycled according to standards and safely disposed. Power battery manufacturers shall establish a whole life cycle tracking system for tracking and recycling electric vehicle power batteries. This recycling system will first be implemented in Shenzhen on a trial basis, and then shall be gradually extended nationwide.

With the rapid development of the e-mobility industry the Chinese government will pay more attention to the quality and safety of e-mobility. According to the abovementioned circular and plan, the Chinese government will issue more specific measures, regulations and standards in the near future to facilitate the implementation of the circulars. This means that in addition to taking advantages from this booming electric age, e-mobility producers will also face challenges and will face more responsibilities with respect to product safety, quality and environmental issues.

 

Further Information

Dr. Ulrike Glueck is the managing partner of CMS, China. CMS advise in the areas of corporate and M&A, distribution and commercial, employment, banking and finance, insurance, competition, real estate and construction, IP, dispute resolution as well as tax and customs. They have been active in China for more than 30 years. Dr. Glueck can be contacted via: ulrike.glueck(at)cmslegal.cn. Emily Xu is a senior associate at CMS, China.

Features 2 - The Inner Race of Influence

For many Executives Influencing Others Comes from within their Character
by WARWICK JOHN FAHY

One of the greatest challenges facing leaders in China today is the compulsion to drive rapid change in a complex, high-pressure environment. The world we live in is increasingly volatile and unpredictable as social media, financial technology (fintech), and mobile commerce shake up the business world. As the global economy becomes more uncertain, business leaders feel under greater pressure to deliver results. We have observed that leaders with a strong executive presence to leverage their credibility, respect, and reputation inside the company are better equipped to lead this change.

 

What do we Mean by “Influence”?

By influence, we are talking about the habits that lead someone to become influential through the spoken word. As the German philosopher, Hannah Arendt observed, “We live in language,” and business leaders who can describe the future in a way that engages people’s hearts and minds are in high demand. This ability to unite people comes from creating shared identities.

Renowned researcher on influence, Dr. Robert Cialdini talks about an influencing principle called the “unity principle:” The more we identify ourselves with others, the more we are influenced by these others. If you create a bond with your audience so that it creates a shared identity, this will become a great asset in your ability to sway this group of people. So how can you create such a connection? Well as one German executive said, 'It takes patience and stamina' to be influential in China.' First, we need to understand what influences and what doesn't.

 

Emotions Control Decisions

I believe influence is transferred through emotions. Like the ageold sales proverb advises, “People buy on emotions and rationalize their decision with logic.” A decision is triggered automatically, like a photograph being taken once the camera button has been clicked. Then a person uses their intellect to come up with reasons, facts, and figures to justify the already-made decision. It’s important that we emphasize this point, because most people today still believe that they are in control of all their decisions. Since the 1930s, books like Propaganda by Edward Bernays and Hidden Persuaders by Vance Packard have laid out the principles driving influence seen in advertising and marketing. While technology has changed a lot in 80 years, the way people make decisions has not. Companies like Facebook have taken influencing behavior to a level almost beyond our comprehension. In 2014, a secret study by Facebook involving 689,000 users proved filtering a person's news feed could influence their mood. Even given this evidence, people stand adamant about not being influenced by these factors. But how does technology actually influence our behavior?

 

Technology “Tricks” us into Believing we’re in Control of our Decisions

When it comes to adopting the mobile internet, China is leading the way with The Wall Street Journal reporting that over 90% of China's 620 million web users have mobile access to the internet. These massive changes have created huge benefits and opportunities for people to run businesses, keep in touch with friends, and make payments easily. However, there has been a cost in the rapid adoption of smartphones. People’s attention spans have fragmented and lessened their ability to focus. Computers are becoming adept at changing our behavior. This phenomenon was researched by Stanford University Professor B. J. Fogg, who coined the word “captology,” which shows how the field of persuasion and influence overlaps with computer technologies in a manner in which computers can change people’s thoughts and behaviors in predictable ways. We are mostly unaware of how we are influenced to take certain actions.

 

We are Not Vulcans

Even the “rational” field of finance is driven by emotions. The legendary investor John Templeton, reflecting on his successful 45-year-career, admitted that most decisions are made emotionally. So, what does that mean for business leaders? I have worked with many business leaders who come from technical disciplines like engineering, finance, research, IT, and medicine. Many of them, of course, use facts and figures to influence people. If we lived in a world of pure rationality, we would be like Sherlock Holmes, Mr. Spock, and the Vulcans communicating purely through ideas, but that is not the world we live in. The 2016 US Presidential election showed how emotions play a large part in the outcome of hugely important events. So, if people are driven through their emotions, the influencer’s role is to make an emotion-to-emotion connection in order to be successful. Connecting to Emotion and Deeper Meaning

 

Connecting to Emotion and Deeper Meaning

In 1999 Jordan Peterson, a clinical psychologist and tenured professor of psychology at the University of Toronto, published Maps of Meaning: The Architecture of Belief to devise a deeper understanding of how we construct meaning. He found that archetypes, like the mythical hero, have deep implications on how we make decisions. Peterson has also contrasted how the plots of popular Disney movies contain clear connections with myths and stories based on thousands of years of human storytelling. Clearly, our ability to create meaning through our decisions are guided by many large (and mostly hidden) forces.

The more light that we can shine on these forces, the more proficient we can become at understanding ourselves, in terms of how we are influenced and how we can apply such forces to influence others.

In today’s global business world, the best business leaders are able to tap into these ancient world myths, like the hero’s journey, while communicating to their people. They create a shared bond using Cialdini’s unity principle. The power of myth is not only for movies, books, and telling children’s stories. It plays a fundamental part in how all business leaders represent themselves to the world. Every leader needs to create their own archetype, one that people can buy into. Xiaomi founder, Lei Jun, played up an image of being “the Steve Jobs of China” before he gained mass popularity. In politics, Angela Merkel has been known as “Iron Lady” and “Mutti” indicating how archetypes can change over time.

 

Expand our Circle of Competence

My hobby is triathlon. When I started out in this sport, my first objective was to “complete” a race. In other words, just get through a swim, bike, and running race—and crawl across the finish line. The first few races I did were definitely “completions.” I was so happy simply to finish the race. Later, as I learned more about sports nutrition, effective training techniques, and race pacing, and as I got fitter and stronger, my results improved. I started moving from the bottom 20 percent of my age group to middle of the pack, then gradually moving to the top 10 and then top 5 percent. I reached podiums and won four races. My goal was now to “compete.” I had moved from complete to compete. I had expanded my circle of competence gradually.

The wheel is one of the most enduring of human inventions. Over 15 years working with executives around China and Asia Pacific, we have devised a framework, using the wheel as a metaphor, that codifies the influencing qualities we have observed in the most impactful leaders. We call this framework, the Wheel of Influence.

The Wheel of Influence has a central hub called your Inner Core, which comprises character and credibility. The rim that makes the Wheel of Influence move is called your Outer Edge, consisting of message and spoken delivery. The inner core habits refer to character qualities. This is very important for China-based leaders, like Gerwin Gaedigk, managing director of Voith Industrial Services. Mr. Gaedigk explains the importance of Role Model, “Walk the talk, since Chinese will not trust so much what they hear but what they see. Always respect the chain of command, don't talk to people over the head of their superior or be cautious about this.” It's refreshing to hear that even in a world where “alternative facts” are used to cover up lies that integrity, consistency and taking responsibility are still important for influential leaders.

Peter Wolkowicz, deputy general manager at TRIAD China, a German creative agency focused on spatial communication, points to the power behind Contribute, “What business leaders in China lack are socio-cultural role models, people who show social responsibility and respect, people that truly commit and "give back" to society and country rather than just adding another charity event that obviously serves PR reasons.” This is very much in tune with the zeitgiest in China today with Alibaba holding its first philanthropy conference in Hangzhou in 2016 to inspire a new generation of Chinese to make a positive social impact on the world. Mr. Wolkowicz also comments that genuine influence is built on sustainable and responsible actions from leaders to foster respect and collaboration amongst a team that goes beyond just pushing for the next growth numbers.

These inner core qualities reinforce the outer edge qualities, like Simplify and Uplift. These traits are most often linked to a leader's public persona. Steve Jobs was a master at simplifying a clear message and almost every Jack Ma talk uplifts the people around him. However, rhetoric alone does not create an influential leader. Flowery words are not enough to please today's demanding internal and external stakeholders. As Mr. Gaedigk observes, “The Chinese will try to see beyond your "public persona" to see what kind of person you are and whether they can trust you. You are under surveillance of thousands of eyes and ears every day. If your message is not consistent or is not aligned with your actions people will notice and your influence will dwindle.”

Business leaders can enhance their influencing abilities by considering how well their inner character-based habits are lining up with their words and actions. The most influential leaders are not only walking their talk, but they live and breathe it too.

 

Further Information

Warwick John Fahy is a professional facilitator and trusted advisor to executives who wish to improve their communication and executive presence. He has authored several books including Influence: The Jack Ma Way. For more information, please visit www.warwickjohnfahy.com.

More than Business - The Football Project

The Football Project
by STEFAN AHRENS

Imagine when you were young, all the long school days of sitting and listening to classes. Physical education provided an opportunity to relax, to leave the congested classroom and storm onto the playground to let some steam off. Aside from the fun it provided, sports education is a vital part of a child’s development of all sorts of useful skills. However, in Shanghai, especially schools that educate migrant worker’s kids face harsh scarcity of resources and are often unable to provide qualified sports teachers to help these kids develop basic movement skills and enjoy some healthy exercise.

In fact, sometimes they can only provide one teacher for 600 kids Or the math teacher delivers sports classes. The consequences of a lack of exercise and physical education are far and wide, as sports can also support the development of intellectual and social skills such as team spirit, tolerance and respect for each other. It is also particularly important from a health point of view, since child obesity is rapidly becoming an issue in China.

With Germany being one of the major football nations in the world and many Germans – even in Shanghai - fervently supporting football, German companies as well as committed professionals from all areas of business teamed up and threw resources together to develop a Football Project that aims to support these schools in delivering qualified sports education with up to date and age appropriate training schedules and methods.
After all, football is a true team sport and requires all the basic movement skills many children are lacking.  

Financially supported by the companies Kaercher and Kuka, equipped by Adidas and with the know-how supplied by vega sports, the venture was ready to move.

To make it sustainable, Chinese coaches must train Chinese kids. Therefore, an experienced football coach, Thomas Ochs, was hired. Mr. Ochs had previous work experience at Chinese schools and knew what was needed to help these children succeed physically but most of all, with fun! A special curriculum was developed to teach the basic movements while focusing on football.

15 students were chosen from the sports university in Shanghai and they were offered with the tools both theoretical and practical, to educate large groups of children in small spaces, since some schools only have a basketball court to play on. An afternoon football program was created and coached by the trained university volunteer students.

During day time the coach and his Chinese assistant took over regular PE classes at the school, the students trained the children of third grade in the afternoons, always assisted by the German coach to ensure methods are consistent with the values of children’s sports education. A very strong team has developed and they have managed to achieve great progress at the 6 schools that participated in this pilot project using their very limited resources.

Through the support of Evonik the football project convinced Borussia Dortmund to send two professionals and three youth coaches for a one day football camp at one of the schools during their China Tour 2016.

The outlook is bright! Two Chinese organizations have joined the project, adding local resources to the portfolio. In the next step the project is targeting another 20 schools to be included into the program, also setting up an intra–school league to offer the kids a possibility to use their acquired skills in a competitive environment. The vision is to include all 200 migrant schools in Shanghai and even move beyond.

A joint training and exchange program between the two German schools in Shanghai and the Chinese schools will start soon and should further enhance Sino–German ties.

To get involved in the football project or to find out more information please contact Mr. Stefan Ahrens via stefanahrens(at)mac.com

01 | 2017 | BIG DATA & E-SOCIETY

Foreword and full PDF

Big data has been one of the media buzzwords in recent years. The computing of large amounts of information is not only about data volume, it is also about its velocity and variety.

Nowadays, big data is already present in a myriad of industries. In the healthcare industry, it helps to predict epidemics, cure diseases and improve the overall quality of life. In finance, big data allows banks and online lenders to evaluate credit worthiness and prospective borrowers, or analyze the risk of investing in certain stakes by inputting stock feeds, tweets and breaking news into complex algorithms.

This edition of German Chamber Ticker sheds light on opportunities and challenges that come along with e-commerce and big data. Moreover, we also highlight the status of artificial intelligence in the world economy. As always, we hope you enjoy reading.

Yours sincerely,

Jens Hildebrandt

Download the PDF here

Cover Story 1 - The Big Data Dealers

How Information Processing Changes Major Industries
 by ANNIKA BEIFUSS and ELLEN TATHAM

Chances are, unless you’ve been living in a cave – and maybe even if you have – you will have encountered the term ‘Big Data.’ The challenge, as with so many media buzzwords, is how to define it, and where to draw the line.

 

Getting to Grips with Big Data

In general terms, big data is the enormous amount of data generated in the digital age, which is too large and changing too rapidly to be processed by conventional algorithms and databases. The three V’s of big data - volume, velocity, and variety - capture its range and meaning. It is the data that we provide to companies, organizations, and online platforms every day.

The big players of the digital industry like Google, Amazon, Facebook, IBM, Microsoft, Baidu, Alibaba and Tencent own unimaginably large data pools. Even though we think that our behavior is unique and unpredictable, statistics show that the force of habit is strong with us. We still cannot see the future, but big data helps to predict increasingly complex patterns.

From the users’ perspective, there are two types of big data: The information that we provide daily and actively when we use social media, and the data that is collected without our will or even knowledge, we could call this unconscious data.

 

Endless Possibilities

While the term big data has been in circulation since the nineties it is really from the noughties onwards that there has been a steep increase in popularization and general understanding. The possibilities for specific industries are vast and while some are just testing the water, others are pushing full steam ahead and big data is helping them become more efficient and productive.

 

Healthcare

The healthcare industry is one of the most promising areas where big data can make a real change. It can be used to predict epidemics, cure diseases, improve quality of life and avoid preventable deaths. As the life expectancy of the global population rises, big data is influencing the new healthcare models for treatment delivery. There are three major types of data in the healthcare industry: Individual medical records, health research records, and business (organization) operations records.

The patient’s individual health record takes the form of electronic medical records, medical imaging, claims information, lifestyle and activity data collected by smart devices, knowledge on nutrition and diet etc. These data are usually contained in different systems and formats; merging the individual medical data alone is no small challenge.

Health research records are data-intensive by default. Clinicians have collected data and drawn conclusions on patients’ treatment for hundreds of years. Now that there is almost no limit to the data that we can process, the research output is growing accordingly. However, in order to be useful for other researchers and doctors and eventually the patients, the information needs to be structured and labeled systematically and compatibly for other formats, which does not happen the majority of the time.

The good news is that business operation processes in healthcare, such as billing and scheduling, have been digitized for years. The bad news is that the information is often fragmented and rarely standardized. Thus, it is effectively unusable for big data unless it is made available through improved database systems.

The two challenges in using big data for healthcare are the secure handling of the patients’ records and the harmonization of data to make it usable. Integrating the different data like medical records, health research records, and business operations records would require developing new infrastructure so that all data providers collaborate with each other . In a heterogeneous system like the European Union, the harmonizing of data formats, processing, analysis, and transfer is a tremendous effort with many technical and legal barriers. China’s big data gathering and processing on the other hand seems a lot more promising.

In June 2016, the State Council issued a circular on how big data in the health and medical sectors is to be applied and developed. According to the circular, unified and interconnected platforms of the popula t ion health should be established, the sharing and opening-up of health and medical data resources should be promoted and big data applications in health and medical industry management, clinical research and development, public health, new industries, and digital health and medical equipment are to be boosted. Jin Xiaotao, vice-minister of the National Health and Family Planning Commission (NHFPC) said as early as 2020 there will be a national platform "that fits national conditions."

 

Consumer / Retail Industry

In retail, big data helps to find promising trends. Social media posts are scanned for buzzwords and web-browsing habits are analyzed; ad-buying data is interpreted to see which products are promoted intensively; so called “sentiment analysis" can help determine the context in which a product is discussed. That way, buyers in shops can make decisions as to what will be “in” in the coming months.

When the trend products have been found in the above mentioned process, and the customer wants to purchase something, a data package is created and transmitted automatically as soon as the product is scanned or purchased online. The data package contains information as to how many items are bought of the same product, what day of the week it is, what other products the customer buys along with it, and it might even contain information about the weather on the day of the purchase. Based on these data, computers can then calculate regularities and formulate predictions about future purchasing behavior. Credit cards, discount cards and membership cards are helping retailers to understand the consumer behavior even further.

The offline customers’ information is paired with geographic and demographic data of the region. A supermarket manager, or rather the software they are using, can then make more informed decisions in their managing. The software helps to optimize decisions about every single product in a certain store on a specific weekday. These may be decisions like stacking up on pumpkins, reducing the price of potatoes for the weekend, or delisting bitter cucumbers altogether. The supermarket manager can save a lot of money for the market if they make the right decisions.

 

Finance

Big data is also changing finance, first by creating more transparency. Lack of transparency has been cited as one of the major issues causing the 2008 recession. With increased transparency, current and prospective investors are made aware of the risks of certain stakes, so that they can react faster and more precisely. Having financial data made public also helps to prevent fraud.

Secondly, big data expands avenues for risk analysis. It allows banks and online lenders to assess credit worthiness of prospective borrowers. They are able to see exactly how long someone spent on the terms and conditions page, thereby determining whether they read it thoroughly. They can also see whether they are making a lot of deletions while filling in the form, which could indicate that they are lying on their application. Also since big data is able to analyze the customers’ social media profiles, spending habits, credit reports and credit card repayments in seconds, the credit approval process is vastly speed up.

Thirdly, trading by algorithm, which inputs breaking news, tweets, and stock feeds into an algorithmic engine to provide even greater background for trade decisions. Algorithm trading was almost non-existent ten years ago, yet is likely to amount to about one third of all currency trades in 2016.

Fourthly, using customer data to understand who they are, is important to any industry but especially so in finance. Traditionally banks have kept all their data separate and not integrated them into a big data system. Not integrating and analyzing data can cost banks a lot of money. Studies have shown that those that do are leading over those that don’t.

It must be noted here that in China, BAT (Baidu, Alibaba and Tencent) are all already far ahead of their western counterparts. All three are already directly involved in banking themselves and able to use their vast big data storage with all their integrated technology to gain an even bigger and more accurate customer profile.

 

China vs the Rest

It is safe to say that big data is here to stay. It is likely to continue to enhance our lives in many ways as companies begin to further embrace and understand the uses. Yet for those of us that live/have lived in China and know the landscape here, it seems much more the norm. We embrace the use of big data, because it is making our lives easier. Your journeys are tracked on Baidu maps, Alibaba knows where you took your taxi via Didi Dache, WeChat knows that you went to see a film on Saturday because you used WeChat wallet to purchase the tickets.

In China, people want to be able to do everything conveniently via their mobile phone, whereas so many in western countries worry about the security of their data. Therefore, progression in big data is slower and less connected. However, slowly but surely things are starting to move in Europe. Chancellor Angela Merkel said in November 2016 on Germany's 10th IT summit in Saarbruecken: “Data thrift (i.e. only a minimum of personal data should be collected and used) cannot anymore be the guiding principle for developing new products.” In order to keep pace with the digital (r)evolution worldwide, politicians and industry representatives of the western world are now more and more willing to lay bare our living and consuming habits. The currency is our data; what we are trading for is progress, convenience and an even more connected world.

 

Further information

Dr. Annika Beifuss holds a PhD of English Literary Science from the University of Tuebingen. She has several years of practical experience in writing and editing for press releases and articles. Dr. Beifuss worked as part of the German Chamber Ticker team and as project manager for the German Chamber’s CSR initiative More than a Market before relocating to Japan in March 2016. She can be reached via annika.beifuss(at)nakora.net

Ellen Tatham holds a BA in Chinese (modern and classical) from SOAS (the School of Oriental and African Studies). Ms. Tathamis a member of the German Chamber Ticker team. Additionally, she is the project manager for the German Chamber Benefit Program in Shanghai and neighboring provinces. She can be reached via tatham.ellen(at)sh.china.ahk.de or 021-3858 5075

Cover Story 2 - Data is Opening Doors

How Big Data will Change the Way you do Marketing
by AHMET TOMBUL

Technology and the digital revolution have changed the way companies and organizations do marketing in today’s world. Businesses have more marketing options than ever before. They have more marketing data, increased marketing formats and a wider variety of marketing channels to communicate with consumers. Digital marketing alone has created many ways to reach prospective and existing consumers by using websites and blog posts, sponsored content, social media and search engines, online reviews and ratings, videos and all kinds of banner ads on desktop computers, tablets and mobile devices.

The digital revolution has allowed consumers to access information within seconds and select only the content which is relevant for them. Internet users have the power to decide what to consume. The more relevant information is, the more likely it will be consumed. Web und mobile users are ignoring any kind of irrelevant information, especially advertising. But to the surprise of many marketers, relevant advertising still has value for users. The ultimate result in recent years was that marketers started to focus on creating personalized experiences for their target audiences. Customers are no longer put into segments. They are treated as individuals. Data has opened the door for marketers to do this by better understanding their users and delivering highly relevant and personalized experiences at every touch point.

The main challenge for marketers is therefore to utilize and maintain the full scope of the relevant options and channels. In the business world of today, identifying the ideal target audience from the existing data, figuring out which channel this audience tends to use and which products and services fill their needs is the path for organizational success. Data and the insights of data are the key features for this success. Information is power once again. This is especially true for marketing. Data and information are becoming an integral part of creating successful marketing campaigns. Big data has a tremendous impact on the collection and creation of data-driven and personalized information today and in the future. But what exactly is big data?

 

Big Data

One look at the phrase big data might not clearly explain what big data really means. The word big in the term big data seems to reduce the meaning only to large volumes of data or information. But it is not only about the data volume. It is also about the complexity of data. These kinds of data sets are large and complex to capture, store, search, analyze, visualize, transfer and share with traditional data processing applications and solutions. They require new data management solutions, which run parallel on a massive number of servers in data centers or in the cloud. In 2012 Gartner defined big data with the following sentence: "Big data is high volume, high velocity, and/or high variety information assets that require new forms of processing to enable enhanced decision making, insight discovery and process optimization."

 

Traditional Marketing vs. Digital Marketing

Many professionals working in marketing may feel like data has always been big - and in some ways it has. Customer data was already collected 20 years ago, through for example point of sale transactions, responses to direct mail campaigns, coupon redemption, phone call surveys, etc. But this data is nothing when compared to the customer data collected today from online purchase, click-through rates, browsing behavior, social media interactions, mobile device usage, geolocation related data, etc. Comparatively speaking, there is no comparison! The amount and complexity of data has increased tremendously. Data has delivered better insight to customer behavior and engagement. Digital marketing has allowed companies to reach and interact with customers in a way that was never previously possible.

Marketing is no longer one way and static. It is highly dynamic and interactive. Digital marketing and especially social media allows companies to encourage their prospects, clients and followers to take actions, visit their websites, read about their products and services, rate them or their products and services, buy online and provide feedback, which is visible to others in the market. It is no longer difficult to measure the success of marketing campaign like it was with commercials on TV, radio or billboards. Analytic solutions are nowadays available with a click on a button and deliver valuable information regarding number of visitors or subscribers, user behavior, conversation rates, etc.

This is all possible through technology, but also through data, especially big data. In this context, it’s not the data itself that’s so important. Rather, it’s the insights derived from big data, the decisions and the actions marketing professionals do that make all the difference. Big data can deliver insight into customer engagement and answer the following questions: Who are the customers? Where are the customers and what do they want? How do they want to be contacted and when? Big data can help to discover what influences customer loyalty and what keeps them coming back again and again. Big data can also determine the optimal marketing spend across multiple channels and continuously optimize marketing programs through testing, measurement and analysis.

 

Big Data in Marketing Today

Marketing is one of the main areas where big data is already present and accessible to all sizes of companies and organizations. Today, analytics is the most popular application of big data in marketing. Analytic solutions allow companies and organizations to understand what visitors are doing on their corporate websites, online shops, social media pages and mobile applications. Analytic solutions deliver comprehensive information regarding the number of visitors, their languages and locations, their page views, clicks on banner ads, email newsletter, documents or videos, and many other actions carried out by users when they visit a digital property. It is relatively easy to run a digital marketing campaign and measure the results of each activity in that campaign with analytic solutions. These are massive amounts of information, which are captured from every single user and processed, analyzed and displayed in real-time using big data techniques and solutions. Analytic solutions provide valuable information for marketers and allow them to better understand their target audiences and manage their marketing campaigns and activities.

Another very good example of big data usage in marketing is retargeting, also known as remarketing. In digital marketing, it is wellknown that the user journey from the very first moment to the final action is long and complex. Only a few users convert on their first visit and many users drop off without doing any action no matter how memorable or interesting a business or product is. Retargeting keeps track of people who have previously visited a site and display retargeting ads to them as they visit other sites online. Unlike typical banner ads, retargeting ads are served only to people who have already visited a website, online shop, social media account or mobile application. Airlines and hotels are among the most popular businesses globally, which use retargeting advertising. When a user searches airline tickets on a website from an airline company, but didn’t buy that ticket, then these users will most likely see targeted ads from that company for a short period of time when he or she visits other websites. Airlines know that most users buy tickets a few days to weeks later and not on the same day when they start their search. Airlines use this timeslot to bring the user back and convert them to paid customers. There are many other businesses also making good use of retargeting campaigns in their industries. So, what role is big data playing in retargeting or remarketing? All service providers who offer retargeting options are using big data techniques to display targeted advertising based on the products and services a visitor was interested in the very first moment.

A third example of big data usage in marketing, are campaigns running on social media sites. The huge amount of data collected from social media users when they post a message, upload a picture, like or dislike something, comment or do other activities on their social media account allows social media site operators to create specific user profiles. These profiles allow companies to run campaigns on social media sites and target audiences based on specific interests, gender, age, activities, preferences, etc. Capturing and processing that information in real-time to build user profiles requires big data techniques and solutions. This data is also not collected and processes one time only. It is an on-going process to create better profiles from each action carried out by a social media user. These are just three examples of big data solutions in marketing. There are many others.

 

What is the Future of Big Data in Marketing?

Big data might be a relatively new term in the business world, but it is not necessarily new to digital marketing. Search engine providers like Baidu and Google are the best examples of big data companies. Many years ago, they introduced products and services, which at their core are big data solutions when you follow the definition from Gartner. Google launched Google Analytics 10 years ago, by 2012 Google had 10 million businesses using their analytic solutions. If there were in average 10 visitors per hour on one of the Google Analytics enabled sites and if each visitor was visiting 5 pages, then Google had to capture and process 500 million page views per hour. This is a lot of data and in reality the number is most likely much higher. A few years ago these results also became available in realtime to businesses. This is only one example demonstrating what big data and technology can archieve together. There are many other companies and service providers such as: Alibaba, Tencent, Amazon, Facebook, Twitter, etc. which are all big data companies. Big data is therefore not really new to digital marketing. Many applications are built on big data and every year new products and services are introduced to businesses and organizations.

The next years are therefore going to be very exciting for marketing as big data application will collect more data and deliver more insights from data. There will also be more devices connecting to the internet and these devices will create additional data. Some of these are already on the market: Health tracking devices or smart home applications (i.e. Amazon Echo or Google home) are already collecting data, but this data is not yet open for businesses to access. It is only a matter of time until these and similar data will be accessible. Data and technology together will create better user profiles and allow businesses to find innovative and better approaches to reach and engage with customers. Marketers must therefore stay on top of technology trends not only for the immediately apparent benefits of making business processes more efficient. The trends unleashed by technology almost always have unintended consequences that marketers must be prepared to take advantage of.

 

Further Information

Ahmet Tombul is the managing director from Vauman, a fullservice digital agency located in Shanghai. Vauman focuses on digital marketing strategies and implementations for clients entering and operating in the Chinese market. Mr. Tombul has been working and living in China for more than 10 years. He is a frequent keynote speaker on topics around branding and digital marketing, ecommerce and social media marketing. He can be reached at ahmet.tombul(at)vauman.com

Cover Story 3 - The O2O Revolution

Why 020 is Crucial to your Marketing Strategy in China
by MARK TANNER

O2O is one of the most cost effective and engaging marketing strategies brands can adopt in China. Most aspirational brands selling in China have a strong O2O component in their marketing mix, yet many foreign brands have been falling behind in implementing O2O initiatives in China.


What is O2O?

Online-to-Offline (O2O) is one of the most used buzzwords in China today, and with good reason. In Western markets, O2O refers to ‘click-and-collect’ items – goods bought online and picked up at a bricks & mortar store. Whilst retailers such as Ikea and Walmart are dabbling with it in China, cheap delivery and low car ownership rates mean that click-and-collect hasn’t taken off here like other countries. Nevertheless, China is pioneering in the O2O category.


Why is China Leading the World in O2O Innovation and Adoption?

Chinese consumers boast the highest rates of mobile internet usage, QR code adoption, mobile commerce and mobile payments globally. Government policy encourages Chinese innovation and leadership in the area and, importantly, Chinese consumers are some of the most enthusiastic consumers for new and convenient smartphone applications. This has led to physical and digital objects being far more intertwined in the Middle Kingdom than in the West leading to a much broader definition of O2O in China.

O2O covers everything from ride sharing and travel, to in-home massage and dry cleaning pickup. The value of China’s O2O ecommerce sales is picked to grow from USD 335 million in 2015 to USD 626 million in 2018 according to iResearch.

 

O2O Beyond the Traditional Definition

Although most O2O forecasts are based on ‘Online-to-Offline,’ ‘Offline-to-Online’ is equally important, particularly for marketers. Chinese consumers are increasingly interacting with brands over the Internet, with 72% online throughout the day according to Epsilon. However, 40% of consumers prefer to interact with a brand in a store – making it the most popular channel and one of the most effective touch points to connect online to build a sustainable and engaging relationship. Stores that integrate online channels backed up with great service, can take advantage of the 63% of consumers who follow brands on WeChat after a good experience.

Shopping center operator Intime is one retailer starting to tap into O2O opportunities to drive foot traffic and sales to its stores, growing revenue at a time when offline sales at China’s top-50 retailers declined 3.1%.

Even the humble bicycle has been enhanced by O2O in China. For many Chinese, bicycles were for poor people and a cold or sweaty reminder of when few could afford a car and cities had no subways. In Beijing, just 12.5% of residents cycled in 2015, versus 38.5% in 2000.

Thanks to more than around EUR 200 million of investments, China’s bike-sharing schemes have changed the face of city streets. Hundreds of thousands of shared bicycles from at least eight competing companies now line footpaths, with consumers in need of pedal power using their smartphone to find the closest bike, scanning a QR code on the bike and then riding. Bike lanes in cities like Shanghai and Beijing are now unrecognizable from the beginning of 2016. Launching just eight months ago, Mobike already has four million monthly active users of its 100,000 bikes across five cities.

Traditional retail and bicycle sharing schemes are representative of an overall O2O revolution in China, evolving at a faster rate than any other major market. With so many O2O applications, the trend is making Chinese consumers’ lives more convenient and creating a gold mine for those who can utilize the data.

 

Which Chinese Consumers are using O2O?

The most fervent users of O2O services in China are the Millennials. They are the consumers who have the highest smartphone ownership, highest adoption of new technology, highest incomes, and greatest willingness to spend and consume. With Millennials in mind, it is the all-important females who are embracing O2O like no one else; 73% of women have used O2O restaurant and dining/food delivery services in the past 12-months versus 49% of men according to eMarketer. Females are also 38% more likely to have used O2O travel services than males.

 

China’s O2O Innovations are Awash with Funding

All the buzz around O2O has attracted plenty of cash for startups. Many commentators are comparing China’s O2O hysteria to the late-90s dot-com bubble in Silicon Valley, where significant wads of cash were invested in unprofitable business models. Chinese O2O start-ups are using their investment capital to subsidize and incentivize Chinese consumers to join the service, hoping they will be the last one standing in a war of attrition. An estimated RMB 50-80 billion (EUR 7-11 billion) a year is being poured into subsidies alone.

The highest profile subsidies are from the ride sharing apps, led by Didi Kuaidi, who’s valuation was EUR 19 billion in July 2016 – 33% up from a year earlier. The company had set aside EUR 3.5 billion to suffocate Uber and their estimated EUR 1 billion of subsidies before the two eventually merged. Likewise, restaurant and cinema reservations service Meituan Dianping vaguely alluded to providing discounts and subsidies of RMB 58 billion (EUR 8 billion) in 2015, just as Alibaba and financial arm Ant invested RMB 1.2 billion on online food delivery service Ele. me, not long after the company was rocked by a food scandal. The subsidies have increased the attractiveness of O2O services, further speeding up adoption rates.

 

What does it mean for Brands Selling in China?

The huge figures and innovations should illustrate the popularity and consequential opportunities O2O presents in the consumer market is right now. It is not just the realm of Fortune 500 brands with large marketing budget, but is within reach for any brand hoping to appeal with these consumers and businesses.

In the retail segment, even back in 2014, the average Chinese consumer who was engaged with a brand online and offline, spent 60% more than in-store-only customers. In the first half of 2015, China’s O2O sector grew 80% year-on-year according to HSBC, who believe the sector is a RMB 10 trillion (EUR 1.37 trillion) market that is only 4% penetrated.

Understanding Chinese consumers’ rational and emotional drivers and how they feature in their customer journeys allows brands to ensure that O2O features are both relevant and engaging to ensure the greatest chance of success in the market.

Agencies such as China Skinny work with brands to determine how online functions can be integrated into offline touchpoints, creating increased engagement, sales, loyalty, and much higher advocacy rates through easy-to-share channels such as social media.

 

The Future of O2O

The explosive growth of O2O in China has seen the lines blur between online and offline touchpoints. With new monthly innovations, online and offline will continue to crossover. Now Virtual and Augmented Reality are adding a whole new dimension to the mix.

Virtual Reality (VR) was the most-searched for tech term on Baidu (China’s Google) in 2016. Alibaba sold 150,000 VR goggles for a fraction of a cent on Single’s Day, a trend that echoes many brands’ use of VR from Tourism Australia to Dior. The explosion of games such as Pokemon Go has allowed widespread acceptance of Augmented Reality (AR).

Uses for VR and AR will span beyond marketing and sales functions and will be increasingly used for training and engagement for customer care, sales, and other staff across China, making them an important consideration to complement O2O strategies.

There are quick and obvious wins for O2O that every brand in China should consider, but introducing smart and creative O2O initiatives can complement other marketing and sales initiatives ensuring they are relevant and engaging to the consumer, which will ultimately increase sales. Viel Glueck!

 

Further Information

Mark Tanner is the managing director of Shanghai-based China Skinny, one of China’s best known market research, strategy and digital agencies. He authors the most-read newsletter about marketing to Chinese consumers, is a regular international speaker and is often quoted in media such as Bloomberg, Reuters and Forbes for his view on the China market. He can be contact via mark(at)chinaskinny.com

Cover Story 4 - China’s New Ecommerce Law

What this will mean for Consumers, Operators and Providers
by DANIEL ALBRECHT

China’s new Ecommerce law, which is in progress, shall regulate the relationship between consumers, platform operators as well as online providers in the field of Ecommerce.

 

China’s Ecommerce Market

In accordance to analysis by digital marketing researcher eMarketer, cross-border Ecommerce in China was due to hit USD 85.76 billion in 2016, up from USD 57.13 billion in 2015. Furthermore the China Internet Network Information Center (CNNIC) reported 710 million Internet users in June 2016. Notably, 40 per cent of China’s online consumers are buying foreign goods and eMarketer estimated the amount of money that each of them would have spent an average of USD 473.26 in 2016.

If the projection that cross-border Ecommerce will have a compound annual growth rate of 18 percent through to the end of the decade — reaching an estimated USD 222.3 billion — will come true, the consequence would be that China’s Ecommerce market will catch up with those of the US, Britain, Japan, Germany and France combined by 2020.

 

China’s New Ecommerce Law

As the Ecommerce market is constantly changing and undoubtedly its major impact on social life and the current economy cannot be denied, it seems to be necessary to provide a legal framework to give answers to upcoming questions within the scope of Ecommerce.

Hence a new Ecommerce law is in progress and drafts are waiting to be adopted. The new law shall remedy the current situation by promoting the Ecommerce market’s development, putting things straight and satisfying all the parties’ interests. These central ideas are laid out in Article 1 of the recent draft law and shall summarize simultaneously the political objectives pursued by this law.

Fundamental Principles

The fundamental principles emerged from the central ideas and can be regarded as significant basis for both the future implementation and interpretation of the Ecommerce law.

In the recent draft the following principles are suggested: Encouraging innovation, honesty and credibility, allocation of resources by the market, improving the monitoring of innovations, self-discipline and social governance, anti-discrimination, extrapolation of data, balance between exchange and protection. These principles shall complement each other, as this system archives to be comprehensive.

Structure of the Draft

The draft consists of eight chapters and recently 94 articles. The structure is the following:

  • Chapter I: General regulations, Article 1-10;
  • Chapter II: Ecommerce subjects and operators, Article 11-25; This chapter is subdivided into two parts: General provisions and Ecommerce platforms as third parties. The two sub-chapters emphasize the relevance of this law concerning other rules and regulations on ecommerce platforms.
  • Chapter III: Trade and services in the area of Ecommerce, Article 26-44; This chapter is about the conclusion of a contract and its performance as payment and logistics.
  • Chapter IV: Safeguarding in Ecommerce, Article 45-66; This chapter is subdivided into four parts: Data and information, market regulations and fair competition, protection of consumers interests and arbitration.
  • It should be mentioned that chapters II, III and IV are the main parts of the draft.
  • Chapter V: Cross-border Ecommerce, Article 67-73; Cross-border Ecommerce is not only about cooperation and collaboration of several departments (customs office, inspection office, etc.) but also the coordination with international systems.
  • Chapter VI: Monitoring and management, Article 74-80;
  • Chapter VII: Legal responsibilities, Article 81-93;
  • Chapter VIII: Appendix, Article 94.

Relationship between the Ecommerce Law and other Relevant Laws and Regulations

The Ecommerce law shall not repeat the contents already mentioned in prevailing laws and regulations such as the electronic signature law of 2004. Moreover, the regulations of this law shall refer especially to issues relating to Ecommerce. Thus, the general provisions of the contract law are applied in general and only concerning special questions will the Ecommerce law be relevant. Moreover, in the field of consumer protection the Ecommerce law will only be used in addition to the law on protection of consumers’ rights and interests.
While working on the draft other ministries’ regulations were taken into consideration and some of them such as the Standards and Regulations Governing Online Transaction Services of the MOFCOM were even incorporated into the draft in order to increase the draft’s efficiency.

Although the draft also includes provisions about transnational Ecommerce, international treaties and agreements like the UN Convention on the Use of Electronic Communications in International Contracts, the UNCITRAL Model Law on Electronic Commerce, the WTO’s Work Programme on Electronic Commerce, the Preferential trade agreements (PTAs) in the Asia-Pacific region and the data protection provisions of the APEC, the TPP and the RCEP will still prevail. Nevertheless, it is permissible to specify these provisions by national regulations as intended by the Ecommerce law.

Main Contents of the Draft

1. Subject of Ecommerce

The draft makes a difference between the normal Ecommerce operators on the one hand and on the other hand the platform operators as third party, which are the targets of this draft. A clear definition of this group is missing. Although this gap provides space for innovations and future development.

2. Obligations for the platform’s operator

The draft envisages several obligations for the operator of the platform such as verifying the providers’ information, to offer only stable and safe services and to act transparently.

3. Electronic contracts

Not only clear criteria for the recognition of a signed electronic contract but also criteria for an electronic representative are laid out in the draft’s regulations. Unlike stipulated by former provisions a contract can be revoked, if there were tipping errors caused by electronic mistakes.

4. Services for electronic payment

The rights and obligations of the Ecommerce service provider are defined. Especially requirements for the security of the service. Furthermore, in case of erroneous payment the different reasons and responsibilities of the parties shall be examined. Among other principles the presumed-default liability shall apply, if the payment happened unfounded.

5. Express service and logistics

In the new draft, there are also some important provisions relating to express services and logistics. Thus, the liability of the haulage companies is emphasized. Furthermore, the protection of consumers from deception is highlighted. Additionally, the necessity for cashmanagement, security-management and risk-management in the field of debt collection is underlined.

6. Data and information

While Ecommerce is increasing, the consumer protection should also be adjusted to this change. Hence the draft provides many regulations about data and information: Thus, it is laid out in detail under which circumstances data collection is allowed. Moreover, before using the private data, the use of that amount of data has to be approved by the user. However, the security of private data must be guaranteed.

7. Fair competition

The draft also makes clear stipulations, in which way the platforms have to respect and protect the intellectual property. Besides that, it is stipulated that unfair competition is strictly prohibited.

8. Protection of consumers’ interests

Apart from private data and information there are also some other provisions in order to protect consumers’ interests. For instance, other provisions about the completeness of goods and services and about guarantee for consumer interests in general are laid out.

9. Arbitration

Concerning arbitration i.e. Online-Arbitrage-rules will be recognized and the duties and restrictions of platforms relating to this are provided.

10. Monitoring and management system

Furthermore, there are regulations mentioned, which refer to territorial area, social governance and the development of Ecommerce.

 

Future Prospects

Though its large number of clear regulations, the new Ecommerce law would bring many changes and improvements for instance regarding the consumer protection as well as the protection of intellectual property. At the same time, there are also gaps that provide the necessary scope for flexibility and development. However, the current draft has not yet been adopted. It remains to be seen whether the Chinese legislator will pass the law or whether the market will take the wind out of the legislator’s sails with self-regulation. Thus Alibaba - China’a Ecommerce giant - has already set up its own rules and systems to claim intellectual property infringements by developing AliProtect and TaoProtect.

 

Further Information

Daniel Albrecht is a German attorney at law, Guest Professor for Civil Law at the CUPL and founder of Starke Consulting Co Ltd. Starke operates in Beijing and six cities throughout Germany, in cooperation with its partner, Jordan Fuhr Meyer. Their core competencies are legal advisory and IP. Starke is a Trademark Agent licensed by the State Administration and Commerce.

Cover Story 5 - China’s Huge Appetite for Data-driven Decision Making

It Would be a Mistake to not Take this Trend Seriously
by NILS PIHL

When I first moved to China half a decade ago, I had to unlearn a lot of things I thought I knew about the internet. The digital landscape in China was simply bizarre to an experienced newcomer like myself - in many ways, China has a completely separate internet from the one I grew up on. The Great Firewall shuttered me off from familiar faces and habits, and that was certainly jarring, but that didn’t mean the Chinese internet was smaller by any means. The Chinese internet was fully grown in its own right, and had a wealth of novel features and strengths that it took an open mind to discover.

 

Same but Different

I remember struggling with the prejudiced idea that China simply copied Western technology, and at first I couldn’t see past the apparent similarities to discover the innovative ways that China had improved on the experiences I was used to from home. Weibo was, but at the same time wasn’t, a Twitter clone, just as Alibaba was and was not eBay.

The internet reached mainstream adoption in the West many years before China, driven by economic factors that led to earlier mass adoption of home computers, whereas internet adoption in China was driven by the success of mobile. In the West, developers could make use of ample screen real estate and design for users familiar with the mouse and keyboard, and this freedom has clearly shaped our collective design zeitgeist as much as the rise of mobile internet has shaped the design of Chinese applications. I came to China with my own consultancy specializing in measuring and modifying user behavior, and we operated at the exciting overlap between behavioral psychology and big data. This gave us the opportunity to work with some of the titans in China, and to get an in-depth look at how the internet was actually different here.

 

Stronger Together

My first serious wakeup call came when we consulted for Weibo and became privy to some of the industry’s less obvious traits. At the time, it turned out that three of the titans in China had to put their enmity and competition aside to collaborate on big data projects - there simply wasn’t enough Hadoop talent to go around, so these three companies quietly pooled their resources and built in-house analytics systems on older versions. There was no comparing Weibo’s data performance to that of Twitter, not at the time. Jealously and reverently looking at the success of Storm at Twitter and its almost real-time prowess, engineers at Weibo ran overnight batch jobs to handle the three terabytes of daily data that their own microblogging platform generated at the time.

But this deficit in data talent turned out to be a blessing in disguise, as you’ll soon see. A few years later a new technology came around that promised to drastically improve the performance of big data streaming computation. Our team was one of the very first teams in the world to touch Spark, the new streaming paradigm, and we quickly became true believers. We solemnly concluded that we’d have to leave Beijing in favor of Silicon Valley - how could we ever scale up our engineering team here in China?

Early in the summer of 2014 we were approached by one of the former founding members of Tencent and his VC firm, and we were offered a surprisingly generous valuation for a company that hadn’t even released their product - especially in China. It was a multiple on the average investment for a company our size, and although we declined the offer we found ourselves asking what this Tencent founder might know that we didn’t.

 

Fast Adaption

After a year of working with Spark, we sponsored Beijing’s first Spark meetup at a corporate office in Beijing’s Shangdi industry park. We were surprised to see a hundred people show up at a time when there were less than 500 engineers in the world working with Spark. People were keenly interested, and we found ourselves face to face with some of the most important contributors to the technology - local Beijing residents that were, like us, about to leave China for Silicon Valley. Some of them were even going to work at Databricks, the company founded by the makers of Spark, and we quickly learned that Silicon Valley was importing large numbers of Spark engineers from China. Far from the data talent shortage we had seen two years earlier, China had some of the most important big data talent in the world. What had happened? With almost no sunk costs into the Hadoop paradigm, China adopted Spark and streaming at an incredible pace.

 

The Future of Big Data Will Be Made in China

About this time, we heard murmurs of a 9000 node Spark cluster at Tencent, one of many gargantuan implementations that appeared in China almost overnight. We decided to stay in Beijing, and concluded that the future of big data would be Made in China. It’s easy to forget how big the Chinese internet is, and just how much data there is to capture. My mobile provider in China has more subscribers than there are people in North America, and life in China is constantly plugged into the mobile internet. When our client PengPeng has a good day, they account for a very significant portion of all the HTML5 traffic in the world. When we started working with dating platform Tantan, they were a brand-new app but still had 50 gigabytes of server logs every day - and grew to half a terabyte a day within half a year.

On my first visit to China in 2009 I was amazed to learn that at that time, over 1000 cars were sold in Beijing every single day. The city was rapidly approaching 5 million cars, a staggering number, and European automakers were building plants in China to meet the demands of China’s new middle class. Literal truckloads of papers and documents are generated by this volume of sales - a caravan of trucks on the paper trail, plenty of data to analyze. It was one of the things about China that really caught my attention and made me curious enough to move here a year and a half later. What did the future hold in store for a country like China? Today I find myself working with big data in the automotive industry with companies like Daimler in China, and can’t help but feel a gratifying sense of having come full circle as we work on predictive modeling, self-driving cars and profiling user behavior. The appetite for data-driven decision making is huge in China, and local subsidiaries of American and European companies are often more ambitious - and competent - than their colleagues in the West. German companies looking to be competitive in China should take these trends seriously, or face competition from companies that are more data-savvy, more well-informed, and with a firm grasp of the future and understanding of the past. In the age of big data, we cannot afford to look at China as a fledgling contender that merely copies the West. That era is long gone, and we run a serious risk of falling behind if we don’t face this new reality and embrace that European corporate wisdom gained over decades or centuries is increasingly being outcompeted by companies run on data, AI and a belief that knowledge is power.

 

Further Information

Nils Pihl is a behavioral engineer and the CEO of Traintracks.io, an award-winning big data startup dedicated to helping companies go from insight to impact. He is an often-quoted and sought-after speaker and author, and an active evangelist for the #BeiArea tech community in Beijing. He can be reached at nils(at)traintracks.io

Cover Story 6 - Smart Cities Through Big Data

Success in Change Leadership
by CLAS NEUMANN

Since the first industrial revolution, cities have been magnets for people, particularly the young, displaced migrants and innovators. Today, half of humanity – 3.5 billion people in total – live in cities and the percentage will grow to 60 percent by 2030.

Cities are centers of innovation and culture, but as urban populations have exploded so have the problems of city dwelling – aging infrastructure, pollution, traffic congestion and crime. Now a new generation of city managers and politicians are harnessing the power of technologies like the Cloud, Internet of Things (IoT) sensors, and big data analytics to help solve some of these problems and make cities more manageable and livable.

This is a complex undertaking, especially when coupled with constrained financial resources so city leaders are investing in software and services that provide clear benefits and return on investment – software that can help them manage and monitor resources so cities can run more sustainably and citizens can enjoy happier, safer lives.

 

Helping Cities Run Better

“Smart City business issues are driving investment in emerging technologies such as Big Data and analytics, the Internet of Things, cloud computing, and mobile solutions in departments and citywide and often with national government support,” says IDC. “Smart City solutions leverage information and communications technologies not only to deliver higher-quality citizen services more efficiently but also to realize significant operational cost savings and effect behavior change in government workers, city businesses, and citizens.”

But technology for the urban environment is never an end in itself, even for the very smartest of cities: It must always dovetail with the strategic objectives of visionary urban development. Smart cities use data available from connected devices to benefit their citizens. That means an IoT application (such as traffic enforcement) is just the starting point. The real value comes from breaking down the barriers between data silos, combining massive quantities of relevant data from multiple sources and then using technology tools to analyze it in real time, make decisions and take action. The result? Better services and quality of life for citizens.

 

From Big Data to Smart Data

SAP recently expanded its commitment to help urban leaders deliver a high quality of life to their citizens, building on its “Urban Matters” initiative launched in 2012, with a new program called SAP Future Cities. As part of the initiative, SAP is working with cities worldwide to help them better engage with citizens, drive prosperity, deliver enhanced services, improve tax and revenue collection, address social inclusion, open up government and increase public safety and sustainability.

 

Smart Traffic in Nanjing

The City of Nanjing, once the capital of China, is one of the top 20 cities in China with a population of just over eight million. There are about ten thousand taxicabs, seven thousand buses, and one million private cars running throughout the city road network. To help cope with the traffic volume, Nanjing developed a next generation Smart Traffic system that includes the use of sensors and RFID (Radio Frequency ID) chips to generate continuous data streams about the status of transportation systems across the city.

The city makes use of SAP’s IoT platform and business software solution SAP HANA to analyze traffic movement patterns in real time. In total over 20 billion sensor data are generated annually in the city. This data is combined with other data such as travel behavior of individuals, fare prices, road conditions and area accessibility. Smart traffic analytics using advanced analytical algorithms help the city to make sense of these data. All the information flows into one digital map that gives a detailed view of current traffic conditions across the city as well as the ability to predict status and provide recommendations for planning.

 

Safer Busses in Japan

NTT, the Japanese Telecom giant, teamed up with SAP to help prevent accidents using IoT technology. NTT co-developed a fabric embedded with sensors, called “hitoe” with Toray Industries, to monitor people’s vital signs like heartbeat and nervous system responses. NTT also has been developing an algorithm that estimates fatigue level by analyzing vital data from hitoe. This analysis, indicating heart rate and nervous agitation, goes to the SAP HANA Cloud platform where it’s combined with data including current traffic and weather conditions — and sensor-driven data like GPS signals, and information from on-board devices that estimate the vehicle’s condition.

The predictive capabilities of the SAP HANA Cloud platform together with NTT’s IoT analytics for hitoe will help bus companies identify potential danger before accidents occur. Keifuku Bus Company began testing the new connected safety system in 2016. Keifuku hopes its trial of the new technology will speed up its digital transformation and become a model for connected safety.

 

Preventing Floods in Buenos Aires

Situated at the mouth of the Rio Plata, Buenos Aires is subject to annual torrential rains. Given the city’s aging infrastructure and dense population, flooding has historically been an issue. Clogged storm drains have slowed down the city, caused property damage and even resulted in lost lives.

Today, however, the city is experiencing less flood damage. Sensors have been installed in 30,000 storm drains to measure water levels, direction, and speed. The city is using the SAP HANA platform to analyze realtime sensor data from the sensors and SAP Mobile Platform to provide maintenance crews with real-time data at their fingertips so they can clear drains and prevent floods to help ensure streets and drains are clear.

 

China as Key Investor in Smart City Technology

As the central government in China tries to manage the increase of its urban population to about 1 billion people by 2050, it is determined to make its urban areas efficient and equipped with the technology to handle such a vast population influx. China already put a focus on smart city development in its 12th Five-Year plan (2010-2015).

Xu Lin, director of the Development Planning Department at the National Development and Reform Commission, said in April 2016 that China will move ahead on construction of 100 new smart cities during the 13th Five-Year Plan (2016-20), bringing the total number of projects to nearly 200. The focus of these projects has also been expanded. Initially it was all about improving the efficiency of infrastructure, for example by connecting transport systems or the electricity grid and metering, or by making better use of “smart” data. Today, the government wants to enhance every aspect of urban life – making cities more livable, for example linking doctors with patients for remote therapy, implementing smart lockers for online purchased food near consumers’ homes or through smart e-bicycles (yes, the bicycle will return to China in its smartest form).

As the adoption rate of the Chinese citizens to new technology is extremely high, and mobile penetration is one of the highest in the world; the scale is enormous, China is not only an ideal test-bed for new smart city technologies but is also a market leader and will soon be a major source of such technologies. This is a new chapter of the China growth story – as key technology & cloud vendors like Huawei, Tencent or Alibaba meet enormous local demand and are encouraged by a very pro-active government. This unique combination of local world-class technology and its immediate application will enable Chinese tech giants to play a major global role in making the world’s cities smarter.

For German and other international MNCs this will certainly impose unprecedented challenges inside and outside of China, but also create new opportunities for cutting-edge collaboration and innovation with Chinese tech companies. The key to success in smart city development will be to jointly develop solutions with Chinese partners and bring those solutions together to scale and into global markets. This can only be successful if significant know-how is made available in China and local R&D centers are established. SAP created its first R&D Lab in Beijing back in 1999 and has since scaled to 5 R&D Labs in China’s tech hubs with close to 3000 software engineers in total – the company’s third largest R&D base globally.

 

Managing Expectations

Many cities are currently styling themselves as smart cities, applying the latest technologies to beef up services to their citizens. Despite the hype surrounding IoT, it’s important to remember that not all well-intended IoT projects end up being completed. Rigid administrative regulations and political circumstances can sometimes thwart IoT projects. Sometimes the complex bidding and approval processes for public projects result in the delay of innovate ideas.

The wheels typically turn much slower in the public sector than they do in industry, often because of public scrutiny over how tax money is being spent. The complexity and realization of IoT projects is also sometimes underestimated.

Nevertheless, some Chinese cities have been moving towards fast-track approvals and implementation of IoT processes – including the latest technology from around the globe and giving MNCs a unique opportunity to be part of the fastest developing and most advanced smart city market in the world.

 

Further Information

Clas Neumann is senior vice president, head of Global SAP Labs Network, head of Fast Growth Market Strategy Group. He is responsible for strategy and operations for the SAP Labs Network (SLN) – SAP’s global network of research and development centers. As a member of SAP’s Senior Executive Team, Mr. Neumann’s has more than 15 years’ experience in India and China, and was instrumental in SAP’s entry into China. He serves as a spokesperson in the Asia Pacific Association of German Industries (APA), is a board member in the East Asian Association (OAV) and a member of the Indo-German advisory council of the Prime Minister of India and the German Chancellor.

SAP is establishing IoT labs around the world to collaborate on Industry 4.0 and IoT with customers, partners and startups. Planned locations include: Shanghai, Berlin, Johannesburg, Munich, Palo Alto, and Sao Leopoldo in Brazil.

In the Spotlight - At this Stage, you must Consider the AIIB as a Startup

Interview with Mr. Nikolai Putscher director of the AIIB and representing the European constituency
by SEBASTIAN SUCIU

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Mr. Nikolai Putscher is director of the AIIB and representing the European constituency. He is also Minister Counselor, Financial Affairs Coordinator at the German Embassy in Beijing. He started his career at the Federal Ministry of Finance as Economist. After several years with the IMF, he has worked in various positions at the International Department of the Federal Ministry of Finance. The Asian Infrastructure Investment Bank (AIIB) is an international financial institution initiated by the Chinese government and founded in cooperation with 56 other nations worldwide. The AIIB started operating business on 16th January 2016. Since then the bank launched its first nine infrastructure projects. The financing will be targeted towards electrical power, transport and urban development projects in Azerbaijan, Bangladesh, Indonesia, Myanmar, Oman, Pakistan and Tajikistan. German Chamber Ticker spoke with Mr. Putscher about his work and also about the idea and future plans of the AIIB.

 

My first question is about your role in the AIIB. At the AIIB you represent the euro constituency. In which ways are you involved in the AIIB operations and how does this task integrate with your position here in the German embassy in Beijing?

I will start by saying that at the German embassy I actually wear two hats. One is my position as head of the financial section at the German Embassy and the second is my position as executive director of the AIIB, which means I represent the Euro Area constituency. This consists of ten European countries that all have the EURO as their currency and which is the second largest constituency after China. At the AIIB we currently have two European chairs. The second chair represents seven European countries, which do not have the EURO as currency. The second chair is currently held by my colleague from the British Ministry of Finance. The German embassy represents Germany and is responsible for bilateral relationships with China, whereas the AIIB is an international financial institution. So, my dual position in China is not in conflict, they must to be viewed differently.

 

Jin Liqun, the president of the AIIB, is a world-renowned financial expert. How often do you meet with him and how is the cooperation with regards to the operative work of the AIIB?

The Board of Directors at the AIIB consists of 12 members. You can compare the Board of Directors with the German Aufsichtsrat (supervisory board or council) we are not actually so involved in the operative business of the AIIB. We represent the owner of the bank (the member states) and our main job is to supervise that the AIIB follows all the rules and regulations approved by the board of governors and the board of directors.

The board of governors is the highest decision making body and represents the ministers of the member states, so for example the German Federal Minister of Finance, Mr. Wolfgang Schaeuble is one of the governors of the AIIB. Given that there are 57 member states I guess it is understandable that a board of governors with 57 representatives would not be efficient, therefore the body was boiled down to just 12 directors representing the member states.

The Board of Directors meets with President Jin at headquarter of the AIIB here in Beijing at least four times per year. There are also some infrequent meetings in between when there are very important decisions to be taken, especially on project proposals. I am very much involved with the vice presidents. We have five vice presidents, three are from Europe (France, the UK and Germany).

 

What is the current status of the AIIB? Are there any plans to open offices in other countries for example?

At this stage, you must consider the AIIB as a startup. The AIIB currently has roughly 90 employees, a year ago, when the AIIB was founded there were only 45 employees. It is amazing to see what they already have achieved within the first year.

The AIIB is devoted to three principles of lean, clean and green. In this context lean means that the AIIB for the time being has no intension of opening regional offices.
The idea is that project teams will fly in for project preparation and project management, conduct the discussions and negotiations with the respective member country that is eligible for projects and then control and manage the projects from the headquarter here in Beijing.

Personally, I am not quite sure if this will hold for a long time, given that some of our members like India will have a lot of projects. In the future it may be necessary to have regional offices.

 

Compared to other multilateral development banks, the AIIB is rather a small, young institution. How does the AIIB fit in the current international financial architecture? It is also interesting to talk about the way the AIIB is cooperating with other multilateral development banks such as the World Bank or the ADB (Asian Development Bank).

The intention of founding the AIIB was the need for financing of infrastructure projects in Asia. A recent study of the Asian Development Bank calculated a rough number for the needed infrastructure investment between 2010 – 2020: USD 8.1 Trill. divided between Energy (USD 4.1 trill.), The intention of founding the AIIB was the need for financing of infrastructure projects in Asia. A recent study of the Asian Development Bank calculated a rough number for the needed infrastructure investment between 2010 – 2020: USD 8.1 Trill. divided between Energy (USD 4.1 trill.), Transport (USD 2.5 trill.), Telecom (USD 1.1 Trill.) and Water and Sanitation (USD 0.4 Trill.). These large volumes could not be financed by most of the states in Asia of the existing development banks alone. The AIIB does not only want to mobilize capital from states but has the clear mandate to crowd in as much private capital as possible in order to make a difference for the member states.

The strategic focus could well be according to the current discussion in the bank on energy, transportation and modern cities. As I said the AIIB can provide a huge contribution to the Asian infrastructure development and given the great need there is no competition between the AIIB and other multilateral development banks supporting projects in Asia.

The cooperation between the AIIB and other financial institutions is very close. The AIIB has signed MOUs or cooperative agreements with a number of other development banks, like the World Bank, the ADB and the EBRD. The need for cooperation is immense, especially when it comes to financing of projects. It might happen that some countries are reaching the single borrowing limits of financial lending from one bank, so the AIIB can step in and co-finance projects with these institutions. Let’s say a gas pipeline running through several countries easily costs several billion Euros. The financing is more secure if the costs are divided among several participants. But the AIIB will also develop and finance projects on its own, so called stand-alone projects. Out of the nine approved projects two are already standalone ones.

The present international f inancia l architecture was founded after the Second World War and since then has developed a great framework of social and environmental standards, procurement regulations , transparency regulations and risk frameworks. The AIIB is fully committed to those standards and regulations as I mentioned earlier, one of the most important achievements is the implementation of the principals of lean, clean, and green in our daily work and in our projects.

The need for financing but also the achieved high international standards in procurement, environmental and social standards as well in governance of the AIIB have persuaded more countries to join. We currently have applications from more than 30 countries who want to join the AIIB. Economically powerful countries like Canada, Argentina, Peru, Columbia, Ireland, and Belgium have all applied for membership. We are looking forward to the applications of perhaps more countries in 2017 and an increase in the membership numbers.

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You are talking about infrastructure projects, which is one of the main goals of the AIIB. The biggest infrastructure project in Asia is the “One Belt, One Road” initiative of the Chinese government. Is it the role of the AIIB to promote this project?

Actually, no. “One Belt, One Road” is an initiative from the Chinese government and the AIIB is an international multilateral bank with 57 member states. The management from the bank made it very clear, that there is no connection between the AIIB and the “One Belt, One Road” initiative. However, the AIIB also promotes the idea of connecting both continents, Asia and Europe, via infrastructure projects and thus enhancing growth by connecting countries with each other.

Now if you look at the projects by the AIIB and infrastructure projects from the One Belt, One Road initiative, one might think that they are closely linked. Let me give you an example: The AIIB is co-financing a Pakistani infrastructure project to build a new motorway along the already existing North- South line. This project is part of a Pakistani infrastructure development program that has been up running for some decades. From the outset, this may look as it would be part of the “One Belt, One Road” initiative, but there has been no coordination or cooperation between the AIIB and the Chinese government to align the initiative with the projects of the AIIB. You can construct a lot of connections, but actually there is no connection at all. The Chinese initiative is financed by the Chinese government through the China Development Bank and the China Export and Import Bank. No funds from the AIIB will be used for One Belt, One Road projects.

 

What are the stakes and interests of the European actors in founding the AIIB?

The main purpose for European countries is to support Asian countries to develop their infrastructure. The projects of the AIIB will generate economic growth in Asia and can lift millions of people out of poverty, as China has exceptionally shown during the last decades. It is a huge endeavor and I am sure the bank has all the means to achieve its goals. The existing multilateral development banks were established decades ago, the World Bank for example in 1944 and the Asian Development Bank in 1966. So you can say that they represent a certain area in time. Now, the AIIB is representing the 21st century and the European countries didn’t want to miss the chance to shape the future in Asia through this new financial institution. I have mentioned the three principals of the AIIB, lean, clean, and green. The ‘green’ part is very important for the European member states. I would like to share an example of how they shape the work of the AIIB: One of our member states has vast coal reserves and at the same time great capacities for thermal energy plants. The country needs more energy for its further growth and an energy infrastructure project is under consideration by the government. So now the question was, if the AIIB will finance a coal plant or rather a geothermal power plant, which has a very different price tag. For my constituency, the green label clearly means that the AIIB should offer financing for a geothermal power plant rather than a coal power plant.

 

You have mentioned a few projects of the AIIB and a lot of German companies are participating in similar fields in Europe. Do you see that German companies/business have potential prospects in different projects of the AIIB in Asia?

Yes, definitely. During the founding process in 2015 one of the main goals of the AIIB was to have an internationally excepted procurement policy and directives that offer the chance for companies from all participating countries to apply for these projects. We see this open and transparent procurement system as a means to eradicate competition with other financial institutions and to avoid a race to the bottom.

The AIIB has only been up and running for a year and the board has approved nine projects so far. Six of these projects are cofinanced, the lead finance is either from the World Bank, the Asian Development Bank or the EBRD. They are responsible for the procurement process. At the moment the AIIB has two stand-alone projects where we have the lead finance. We will closely monitor the procurement process for those two projects and will adjust if necessary. President Jin asked the Board of Directors to encourage our national companies to apply for projects. The bank is very much aware of the situation and of the reputational risk, if after let’s say three years we come to the conclusion that basically all the contracts went to Asian companies. That would definitely be an undesirable outcome for us.

Mr. Putscher, thank you very much for your time.

Feature 1 - Big Data, Cyber Security Law and other Legislative Developments

PRC Legal Update
by DR. ULRIKE GLUECK and EMILY XU

In recent years, big data has become a hot topic. Big data means a large amount of available information, which cannot be collected, analyzed or transformed by traditional data processing applications. It aims to get value and information more economically and effectively from highfrequency, large-capacity, different structures and types of data. Big data comes from individuals and in the end, it is individuals that will benefit from the information provided by big data. In this high-speed developing society with a large amount of information, big data can be applied everywhere and helps to create a more convenient life for us.

However, before we widely use big data, we should first consider the issue of cyber security. Unfortunately, the network environment nowadays is not sufficiently secured. On the one hand, traditional cyber security problems such as hacker attacks and virus spread in networks still exist. On the other hand, big data brings new problems, like data abuse, data theft, lack of control over big data core technologies, data ownership, etc. All of these problems can restrain the development of big data and might also cause damage to the society.

In the past, China lacked a comprehensive legal framework designed to address the data protection and cyber security. Current rules regulating the above issues have developed in a piecemeal fashion and are scattered in different statutes and rules. It is obvious that these rules are far behind the development of the information technologies and big data. In response to the urgent needs of cyber security protection, on 7th November 2016, China promulgated the PRC Cyber Security Law (the “CSL”) after three readings of its drafts. The new law will take effect from 1st June 2017. As China’s first comprehensive legislation in the cyberspace, the CSL enhances cyber security protection in many aspects. Its key content is as follows:

 

1. Broad Obligations Imposed on Network Operators

Network Operators are widely defined in the CSL to include owners, administrators of networks and network service providers. Further, “network” is defined broadly to encompass any system, which is constituted by computers or other information terminals and relevant equipment to collect, store, transmit, exchange, and process information. There are reports that Network Operators are likely to include any business operating over networks and the Internet. I.e. all companies owning or operating network infrastructures in China (i.e. not only telecommunication companies but also “normal” manufacturing and trading companies, which have their own IT network with several users) and those companies operating websites can be regarded as Network Operators. The CSL imposes broad obligations on Network Operators.

  • First of all, the Network Operators shall fulfill obligations of security protection. According to the requirements of the classified protection system for cyber security, they must ensure that the network is free from interference, damage or unauthorized access, and prevent network data from being divulged, stolen or falsified, Network Operators have to take measures such as formulating internal security management systems and operating instructions, as well as technological measures to prevent computer viruses and network attacks etc.
  • Other obligations imposed on Network Operators include the obligation of verifying the real identity of network users and formulating contingency plans for cyber security incidents. Network Operators shall also provide technical support and assistance to the public security authorities and state security authorities to lawfully safeguard national security and investigate crimes.

 

2. Stringent Obligations Imposed on Critical Information Infrastructure Operators

The CSL for the first time introduced the term critical information infrastructure. According to the CSL, critical information infrastructure refers to the key information infrastructures in important industries and sectors such as public telecommunication, information service, energy, transportation, water conservancy, finance, public service and electric government affairs as well as other infrastructures that in the event of damage, loss of function, or data leak, might seriously endanger national security, social or economic well-being of the nation, or the public interests.

The CSL imposes a more stringent degree of data security obligations on the critical information infrastructure operators (“CIIOs”). Among them, one of the most significant obligations on CIIOs is the data localization obligation. According to the CSL, CIIOs shall store personal data and other important business data within the territory of PRC. Such critical data is not allowed to be transferred out of the PRC unless it is “truly necessary” and specified security assessments have been conducted and satisfied. However, it is not clear what might constitute important business information and the exceptions to this data localization obligation are vague. The security assessments, which will be released by the national cyberspace administration authorities (i.e. the Office of the Central Leading Group for Cyberspace Affairs and the Cyberspace Administration of China) (collectively “Cyberspace Administrations”) at a later stage, might provide further clarification on this issue.

In the past, data localization requirements only applied to several industries with regulatory restrictions such as banking and mapping etc. The CSL has now introduced obligations on CIIOs in many industries. The relevant big data operators will potentially encounter new challenges triggered by these new requirements. In practice, many companies store information on offshore servers for better storage service, back up data, or in order to carefully store the data in their offshore headquarters. After the CSL comes into force, big data operators have to evaluate their IT infrastructure deploy, and may need to apply for a security assessment before any cross-border transfer. The Cyberspace Administrations together with the competent departments of the State Council will formulate the detailed measures for the security assessment later.

 

3. Restrictions on the Use of Network Products and Services

1.The CSL imposes obligations on providers of network products, raising concerns for big data operators. Article 23 of the CSL provides that “critical network equipment” and “specialized cyber security products” (collectively as “Key Network Products”) must satisfy the national compulsory standards and must be inspected or certified by a qualified institution before such products are permitted to be sold or provided in China. A catalogue will be published by the Cyberspace Administrations for specification of the key network products.

2.Further, in order to prevent the disclosure of important and confidential information of the State, the supervision and control on the network products and services used for the critical information infrastructure is much stricter. According to Article 35 of the CSL, any purchase of network products and services by the CIIOs that may threaten the national security shall go through a security review conducted by the Cyberspace Administrations together with the competent departments of the State Council. In addition, the CIIOs shall enter into agreements with the providers of network products and services, where obligations and responsibilities of security and confidentiality shall be specified.

In the past, Chinese companies and authorities widely used foreign hardware and software in their IT systems. However, with the occurrence of a number of spying and hacking events around the world in recent years, the Chinese government was alerted to the potential risks that critical national information might be provided to foreign governments or companies through this foreign IT equipment. On the one hand, the Chinese government has already started to conduct security reviews on information system security products procured by government authorities especially at centrallevels in recent years. On the other hand, more and more Chinese companies and authorities turn to domestically developed products and services and stopped using foreign IT equipment. The CSL is likely to expand the scope of the product security reviews to all Key Network Products, and probably to all CIIOs. The stringent control and supervision of the network products and services will help the Chinese government to develop a secure and controllable IT infrastructure and system, safeguarding the state’s critical data from leaking.

 

4. Enhanced Privacy Protection for Individuals

The protection of individual privacy is always a key issue to be considered in big data related legislations. In the past the PRC laws and regulations only provided general principles and non-binding guidance for protection of personal data. In the CSL, personal information is defined in Article 76, which refers to various information, which is recorded electronically or any other form and used alone or in combination with other information to recognize the identity of a natural person, including but not limited to: name, date of birth, ID number, personal biological identification information, address, and telephone number. According to the CSL, personal information must be identifiable, which means, if the information and the personal identity are separated, the information shall no longer be deemed as personal information.

The CSL stipulates rules for Network Operators to collect and handle personal information and imposes several restrictions on the use of personal information. I.e. Network Operators shall not disclose, distort or destroy personal information that it has been collected, or disclose such information to others without prior consent of the person. Notwithstanding the above, considering that big data has become one of the state development strategies, the law leaves some room for the development of big data. I.e. an exception is provided under the CSL that if such information has been processed to prevent a specific person from being identified and the processed information cannot be recovered, then the Network Operations shall be exempted from the restrictions. The exception aims at creating balance between personal privacy protection and public interests.

As a large platform that contains enormous data resources, big data platforms provide services to the government, enterprises and citizens on the basis of the network. However, the existing uncontrollable factors in the information infrastructure nowadays bring about a lot of risks. Against this background, the CSL, the first and fundamental legislation exclusively focused on network security protection has been enacted, aiming to solve the problems to some extent. The obligations of Network Operators and CIIOs as well as the restrictions on network products and services will have significant impact on the construction of a more secure big data network environment.

The law may bring a more secure network environment for big data, but also set restrictions, which might hinder its development. We will see the full influence of the law after it has been enforced in practice and the relevant interpretations to the legislative provisions have been enacted. The CSL will come into effect in 2017 and we will continue to pay close attention to further developments in the network security area.

 

Further Information

Dr. Ulrike Glueck is the managing partner of CMS, China. CMS advise in the areas of corporate and M&A, distribution and commercial, employment, banking and finance, insurance, competition, real estate and construction, IP, dispute resolution as well as tax and customs. They have been active in China for more than 30 years. Dr. Glueck can be contacted via: ulrike.glueck@cmslegal.cn

Emily Xu is a senior associate at CMS, China.

Features 2 - Clamoring for a Piece of the Pie

One Belt One Road amid China’s Economic Transformation
by CHE (SHERYL) TANG and SRINATH RENGARAJAN

China’s remarkable economic growth - over 10% annually, strongly backed by capital accumulation has been well documented in the past two decades. However, since 2010, China’s GDP growth rate has slipped from double digits to a 20-year low of 6.9% in 2015. Facing issues including increasing labor costs, low efficiency in state owned enterprises, and stagnating productivity improvement, China is making efforts to advance its economic competitiveness with a range of domestic and international initiatives.

Buttressed by economic growth and accompanied by its comprehensive “Open Door” policy, China seeks to not only be a member of, but also a leader in, global networks like WTO, BRICS, and G20. Meanwhile, China is selective in building partnerships and doesn’t push itself into all networks. For instance, China is not a part of Trans-Pacific Partnership (TPP), claiming that it is not ready to meet the requirements. In reality, this selective approach is one of the distinguishing concepts in China’s foreign relationship policies. China has long been in favor of developing its own FTA platform, which not only allows it to leverage different factors when negotiating with different countries, but also allows more efficiency and flexibility, in contrast to multilateral partnerships. Given the resistance that such multilateral megadeals typically face, it is noteworthy that China’s approach is especially pragmatic, fleet-footed, and effective.

 

One Belt One Road (OBOR)

Against this global geopolitical and economic context, building external cooperation plays an important role in domestic economic transformation of China. Dating back to early 1990s, FDIs helped China enjoy growth and benefit from the technological spillovers from these investments. Currently, faced with decelerating growth and over capacity, President Xi Jinping initiated the “One Belt One Road” (OBOR) initiative as China’s international cooperation strategy. Very quickly, OBOR has become ubiquitous, with an overwhelming number of private and public sector enterprises clamoring for a piece of the pie. At this juncture, it is necessary to take a step back and see the big picture, before jumping onto the bandwagon.

Centuries ago, China was an important economic powerhouse on the ancient Silk Road, trading extensively with Asia and Europe. In tune with President Xi’s “Chinese Dream” which envisions a moderately prosperous society, OBOR was initiated in 2013. It envisages a network that radiates from China to not only Europe and Asia, but also other parts of the world, and not only as a connection over land, but also supported by maritime channels and naval infrastructure. According to National Development and Reform Commission (NDRC), OBOR is a system project that facilitates the connections of national strategies of countries along the routes.

Though fairly nascent, OBOR builds on China’s foreign and domestic policies, incorporating ongoing as well as new projects under a comprehensive umbrella framework. For instance, in 1999 China introduced the “Go Out” policy to promote China’s overseas investment, and in 2001, the “Go West” policy was introduced to advance the development of western China. By promoting Chinese investments abroad and putting focus on western China domestically, OBOR brings both these initiatives under its aegis. As an example, in one of the first OBOR projects, China will cooperate with Pakistan to further connect Gwadar Port to China’s Xinjiang region. This project is a further development of the bilateral cooperation in Gwadar built by China during 2002-2006. It is now repackaged under the China Pakistan Economic Corridor (CPEC). At the same time, in line with China’s bilateral approach towards FTAs addressing strategic strengths of each partner, OBOR projects strongly leverage on advantages of each country or region. For instance, under OBOR, China has nearly three times as many energy related projects as free trade projects with Pakistan, while China’s cooperation with Association of Southeast Asian Nations (ASEAN) focuses on infrastructure connectivity and free trade.

Domestically, OBOR significantly benefits the development of central and western China. Western provinces are the interface with the neighboring Silk Road Economic Belt countries, while central provinces fulfill the roles of logistic hubs and connecting points between the coast and the western provinces. Consequently, projects contributing to energy corridors, transportation, connectivity, and trade ports are emerging in the west while economic zones and logistic hubs are forming in central China. Thus, OBOR directly boosts regional development by providing investment and infrastructure projects on one the hand, and improved connectivity and strategic importance of these less developed regions on the other. Therefore, we see increasing business opportunities in these parts of China.

 

Speed and Efficiency

NDRC marked 2015 as the starting year of OBOR, with over 15 billion US dollars invested from China into 49 OBOR countries. OBOR related FDI reached a year-on-year growth of 18% in this year and accounted for a significant 13% of China’s total FDI. The speed and efficiency of OBOR is strongly facilitated by state visits of the Chinese leadership. A stellar example is the case of Iran. On 16th January 2016 the United States and EU lifted sanctions against Iran. Within a week, on 22nd January 2016 President Xi visited Iran and incorporated it into the OBOR map. According to agreements reached in this visit, China- Iran trade will reach USD 600 billion in 10 years. Compared to TPP, which took 7 years to accomplish, the speed and efficiency of OBOR has been extraordinary and laudable!

Besides intergovernmental agreements, financial infrastructures are being set up to further support the OBOR roadmap. Asian Infrastructure Investment Bank (AIIB) was first initiated by President Xi in autumn 2013, coinciding with the introduction of OBOR. Aiming to sufficiently finance development in Asia without being dominated by the western world, AIIB is founded by 57 founding members including non-regional players such as Germany and Brazil. The AIIB serves the target of building China-led international networks much like the OBOR.

 

The Middle Kingdom – Center of an Impact Map

We see China as the main but not the only beneficiary of the OBOR initiative. Even though governmental OBOR projects may prefer domestic and state owned players, international projects need contributions from foreign players, especially regarding international business knowhow. Compared to the overall efficiency and competitive difficulties that Chinese companies face, OBOR projects per se are only short term remedies, since there is no guarantee of unlimited projects supply. However, by cooperating with international players in OBOR projects, Chinese companies can learn from their partners and improve competitiveness, just as they have succeeded in leveraging joint ventures in China in the past decades.

China has searched for its optimal international position that fits both its status as a rapidly developing superpower and the second largest economy in the world. OBOR seems a step further towards such a position. With this initiative, China tries to turn its traditional, inwardly-focused mentality to an outward looking one, in order to position itself as a future global leader. OBOR puts China in the center of an impact map, in which it firstly reaches out to neighboring counties as well as Asia, and then radiates its power to the entire world. Such a format meets China’s centuries-long self-definition as the ‘Middle Kingdom’. Amid challenging economic transformation, this kingdom hopes to maintain control over how it would like to develop and where it wants to go.

Industries and businesses both in and out of China can not only be impacted by, but also smartly leverage the OBOR strategy. Take the infrastructure and construction industry as an example. The domestic construction industry is facing headwind because of overcapacity and stagnating real estate prices. With OBOR incentives, domestic capacity is redirected to overseas projects such as new industrial zones and transportation corridors. Chinese companies from related industries such as infrastructure design and construction vehicles can also benefit from increased demand because construction companies generally prefer familiar products and services that they use domestically. Chinese investments in Africa over the last decade bear undisputable testimony to this approach and its benefits. Furthermore, downstream businesses such as logistics, transportation, and international trade are positively impacted as a result of the improved infrastructure. In this way, OBOR projects that seem to be in one specific industry trigger a domino of larger business opportunities.

On the other side of the coin, by cooperating with foreign companies, Chinese players will have access to local market knowledge abroad and international management knowhow. As a result, Chinese companies may have the capability of entering those markets with little help of governmental projects in the future. OBOR projects provide export and market entry opportunities for Chinese firms in the short term, which can become significantly profitable in the long term as China makes technological advances with policies like ‘Made in China 2025’. In other words, we should realistically expect stronger competitors from China.

 

Economic and Industry Transformation

Without doubt, OBOR, emphasizing opportunities in developing economies, is not risk free. The projects that are based on intergovernmental agreements may be precarious because of political wrestling. For instance, in March 2016, the Thai Prime Minister cancelled an 845 km China-Thailand high-speed train project, which was introduced four months earlier because of a lack of agreement on investment sharing and development rights.

Viewing OBOR in the context of China’s international relations and economic transformation, we see this initiative as an integrated and influential part of business ecosystem in China. From another perspective, incorporating policies, financial sector, as well as both supply and demand, OBOR is a significant part of economic andindustry transformation. Therefore, being on board OBOR not only brings short-term opportunities, but also places the business closer to a powerhouse of future development. Since OBOR searches for international business partners that can bring knowhow to this platform, it can be a unique chance to position an international player into the Chinese business ecosystem as a strategic partner. Being an integrated part of Chinese business ecosystem, instead of being an unconnected player, is more likely to lead to sustainable business success in China.

 

Further Information

Che (Sheryl) Tang is a German Chancellor Fellowship visiting scholar at the German-Chinese Bureau of Economic Research, an Institute of the German-Chinese Business Association (DCW). Her research focuses on strategic management and Chinese outbound investment. She can be reached through tang(at)gcber.org

Srinath Rengarajan is an External Research Partner and Doctoral Candidate at the Research Institute for International Management of the University of St. Gallen (FIM-HSG), Switzerland, and Strategy Analyst at Daimler AG, Germany. He has a Masters’ degree in Automotive Engineering from RWTH Aachen, Germany. He can be reached at srinath.rengarajan(at)outlook.com

Features 3 - German Business in China

Results of the 2016 Business Confidence Survey
by JANA KUMPF

German companies have experienced 2016 as the most economically difficult of the last years. The overall outlook for 2017 is more positive, reflecting the faith of German companies in the Chinese market and its recovery. Of all industries, automotive is most optimistic, but is also the only industry to curb expectations for 2017. Machinery has had a difficult year in 2016: More than one in three companies (35%) report a worsening general outlook. Expectations for 2017 are more optimistic, but still remain slightly behind the all-industry average.

The German Chamber of Commerce in China conducted its annual Business Confidence Survey among German companies in China between 1st and 28th September 2016 and collected 426 valid responses. Machinery and industrial equipment together with automotive make up over 40% of German business in China. This ranking has remained stable over the last few years, with consulting and legal services following to form the top three. German business in China is characterized by small and medium size enterprises (SMEs), representing the economic importance of the “Mittelstand” in Germany. 73% of respondents have fewer than 250 employees in their local operations in China, and turnover is less than RMB 250 million for two thirds of the responding companies.

The vast majority of German business is located in the main economic clusters in the Yangtze Delta (East), the Bohai Economic Rim (North) and the Pearl River Delta (South East). These are also the most important business regions for German companies. In addition to these main clusters, German companies also maintain close business relations with the Southwest (important hubs in Chengdu and Chongqing), the North (with Changchun as its economic center), as well as some of the central regions. One in six companies consider these areas to be among their main business regions, which illustrates their potential for further development.

BILD

HR Challenges, Legal Uncertainty and Internet Issues

Increasing labor costs and shortage of qualified staff remain key challenges: Three out of four companies regard increasing labor costs and finding qualified staff as a problem or major problem. Retaining qualified staff has become less urgent in the last few years. The share of companies seeing this as a problem has gradually declined from 75% in 2012 to 60% in 2016. This can be explained by more uncertainty in the labor market as the economy cools. Growing legal uncertainty and unclear regulatory frameworks move up in the rank of major business challenges for German companies in China. Bureaucracy/ administrative hurdles and intellectual property concerns also rank in the top 10 challenges, which further undermines that the regulatory environment remains a challenge for German business. Internet speed and access continue to be pressing issues for more than half of respondents.

BILD

Domestic Competition and Innovation

Newly included in this year’s survey, over two thirds of companies voice concerns about China’s economic situation as well as increasing domestic competition. Domestic competition ranks fourth in this year’s business challenges. This corresponds with 75% of German companies facing increasing competition from mainland China. The competition is growing more strongly than from other countries in Asia, the US and from Europe. As in previous years, only a small share reports not having Chinese competitors (4%).

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